How to Avoid the RRSP Trap – Tax Time Bomb
I have two questions for you to answer;
1) If you thought, the best way to save for retirement turned out, not to be the best way, then, when would you want to know? Right now is the time to discover the best way to safely accumulate more money. The sooner you empower yourself with knowledge to attain financial independence, the greater your net worth will become.
2) If you were a farmer, would you rather save the tax on the seed in the springtime and pay tax on the sale of your harvest in the fall, or would you rather pay the tax on the seed and sell your harvest without any tax on the gain?
I would rather purchase the seed with after-tax dollars and later, sell my harvest tax-free.
One of the biggest mistakes we make as investors is forgetting just how much tax we will end up paying CRA, if we rely too much on RRSP savings for our retirement and it only compounds when you add a company pension to it.
Here is an example using a 45 year old person
Let’s say, this person were convinced to purchase the maximum amount of RRSP funds each and every year by their accountant, the Banks and CRA. We are all programmed to do this so that they continue to make money and tell us we are saving tax dollars now.
Now, let’s say this 45 year old person has accumulated a nice sum of, $200,000 in RRSP funds.
Without any further deposits to an RRSP, their money will grow as follows:
Using the rule of 72 and a 10% return for our example.
Their money will double to $400,000 by the time they reach 52.5 years old.
And it will double again to $800,000 by the time they reach 60 years old.
By the time they reach 67.2 years old, this money has climbed all the way to $1,600,000.
Now, if I asked you, would you be happy with that amount of money in your retirement program? You would probably say yes.
Until I tell you, you have a greedy partner called CRA that will take up to half of your income, while you are alive and more than half of your principal, when you die unless you have an estate plan.
If you subtract 10% of your earnings each year and leave the principal intact, your income would be $160,000, which is 100% taxable.
Depending on your tax bracket, you could be paying taxes of $49,428 and up, for the rest of your life until, you die. Is that what you wanted?
Therefore, $110,572, you get to keep and for your CRA partner, $49,428, and this is just the beginning.
If you have other income, that pushes you to the highest tax bracket, 53.55%, you could pay up to, $85,680 to your partners at CRA, leaving you with lesser amount of, $74,320.
For those of you, who do not have an estate, plan in place, because you named your children as beneficiaries, it does not mean they will receive all your hard-earned money, when they pass away.
If you are married, when you die, your RRSP funds are transferred to your spouse, tax free.
After your spouse passes away, 100% of your RRSP funds, along with all of your spouse’s RRSP funds will be lumped together and this increases their tax bracket to the highest…
Therefore, assuming the $1,600,000 is still intact and no money was added from your spouse’s RRSP funds.
The tax bite is at the highest level 53.55%, for any amount over $220,000.
The first $220,000 earned income, tax payable is, $78,765.
The next $1,380,000 tax payable is $738,990.
The combined tax, before any money goes to the children is $817,530.
Your children will then get $783,470.
Then they will be faced with Probate and executor fees of the will.
The question that I always asked my clients is,
”who were you saving all your hard earned money for your family or CRA”?
Not only is there a better way to save 100% tax free but there is also a way you can move your money out of RRSP funds now, without paying taxes.
The highest income tax bracket has crept up, over the last 10 year from 46.3% to 53.55%, an increase of 7.25%.
When you add inflation of 1.73% over the 10 year period, it adds up to 17.3% decrease in the value of your money.
The combined effect of inflation and taxes in the last 10 years has decreased the purchasing value of your dollar by a whopping 24.55% on that $1,600,000 RRSP,
The combined effect of inflation and taxes in the past 10 years means the purchasing value of our money has decreased by a whopping 24.55%.
Which is a big issue for those using low returns that the traditional financial institutes are offering.
On the $1,600,000 RRSP investment that would mean a drop of $392,800 to the value .Or the investment is only worth $1,207,200 in today’s dollars.
Proper Tax planning will increase your nest egg by 2/3.
This amount of income will also cause claw-backs to Government Benefits.
Over their life time, most people have paid over $100,000 to the Government for those benefits and now all that money is gone and now becomes a form of Tax you paid.
90% of financial Planners do not dissect your portfolio like this and therefore you would miss out on real wealth that was yours if you had a better plan.
Reducing taxes is the best option to create wealth for everyone not only the rich.
If you are not reducing your taxes, you’re not creating wealth for yourself and you are for CRA.
It is not how much you make… it is how much you keep from CRA.
Benjamin Franklin said; “an investment in knowledge, pays the greatest interest”.
I have spent hours creating this knowledge for you.