prosequence

Alrighty, I think the states versoin of RRSP (registered retirement saving plan) is the 401k. I think. If not, well, follow along anyway.
Alright, banks were pushing the RSP contribution thing up to tax time, as they do every year. I guess that's a good thing, want to make sure they don't run out of our money so they can make theirs, anyway. So, right now there are a lot of "baby boomers", with a lot of money into these RSP and investments. The investers say "buy into it, it's a good thing", don't get me wrong, I'm all for making 8-12 percent on my investment money.
Here is my two questions:
1. What happens when they baby boomers retire inthe next couple years? Won't ehy start taking their money out to spend and live on? Will htis not drop the growth and value of anyone else's investment in those compnaies?
2. If I understand this correctly, it's only good if you're making less money per year than you do now (when you put your money into it) because you pay a lower tax on your lower income. So isn't htis a plan to be broke?

I have a feeling I'm off base on my understanding of this, so any comments or ideas are truly welcome.

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And now here I stand because of you, Mister Anderson, because of you I'm no longer an agent of the system, because of you I've changed...

Yakk

To clarify for Americans:
RRSP stands for Registered Retirement Savings Plan.

RRSPs are a tax-defering shelter with lots of requirements on what kind of investments can be in it.

Your RRSP contributions are capped at 18% of your income, with a hardcap of something around 20k/year. RRSP contributions reduce your income for the purposes of taxation during the year you put money in, and count as income in the year you take the money out.

RRSP contribution room can be carried over from year to year, indefinately. Taking money out of an RRSP, however, does not generate more contribution room. I believe some pension plans consume RRSP room.

RRSPs have other advantages.

First, there is the first-home-buyer trick: if you haven't owned a home in something like 5 years, you can use up to 20 k of RRSP money on your downpayment, and repay it according to a schedual (without consuming any more contribution room). This is untaxed money you are getting utility from.

Second, RRSPs cannot be used as collateral, and are bankrupcy shelters, if I recall correctly. So, 10 years from now, when everything goes bad, your retirement savings aren't smooched.

Third, I'm sure there are other advantages. I think there is something with education?

Forth, you are partially right. =)

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Last edited by JHVH : 10-29-4004 BC at 09:00 PM. Reason: Time for a rest.

BonesCPA

Interesting concept on the baby boomers, which I have read articles about in various journals. The theory that the all of the money sitting around in investments waiting to be sucked out when the mass influx of retiring baby boomers arrives is partially true, but it shouldn't have the effect that everyone thinks, if an at all.

First, take a look at what drives the stock markets - sales. Why does Microsoft, Nokia, General Electric, etc. stock go up? Because their sales have increased. (Of course there are other factors, but I am trying to keep things simple.) Sales increase when people spend money. When an individual retires, do they stop spending money? They may shift their spending, but they don't stop. You may see less spent on business related items (computers, business clothing, fast food lunches, etc.), but you will probably see an increase in other areas (healthcare, leisure activities, etc.). Some companies will decrease in value, while other increase - just the normal course of business.

Also, how often does a retiree take the entire amount they have invested out of stocks on the day they retire, and shift it into the coffee can buried in the back yard? They may draw down on their investments, but they don't go to zero in one shot. As they draw down their funds, keep in mind there are still people working to get to where they are at, so they are adding funds at larger pace.Keep in mind that the earnings on the investments are also tax deferred. Simple example:You have $10,000 earning 10% for 10 years. Your tax bracket is 25% before and after retirement. At the end of 10 years, in a tax free account the value would be $28,531. If you paid tax on the annual earnings, it would only be $22,156 - assuming you took the taxes out of the investment as they were due.


In any case, it is never a bad thing to save money. The key is to make "smart" investments and stay with a plan of action - you will hear very few stories of people making large sums on a wild guess, but you will hear the opposite.

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Back into hibernation.

Yakk

Bones, do you have your numbers right? 1.1^10 = 2.6, not 2.8. =p

Lets go with 10,000$ and an RRSP and a 25% marginal tax rate:

You earn 10,000$ and put it in an RRSP (thus, not paying taxes on it yet). It grows for 10 years at 10%. You then take it out and get taxed 25%.

You end up with 19453.07$ after-tax money.

You earn 10,000$, pay taxes on it (25%), then let it grow at 10% for 10 years, paying 25% tax on the growth as it happens.

You end up with 15457.74$ after-tax money.

Up your marginal tax rate to 50%, and lower the yield to 8%, and extend the period to 20 years.

10,000$ in RRSP: 23304.79$ after-tax money after 20 years.
10,000$ outside of RRSP: 10955.62$ after-tax money after 20 years.

In general, an investment in an RRSP grows as fast as an investment outside an RRSP with 1/(1-tax_rate) times as much yield, assuming no change in your tax bracket.

Marginal tax rate ---- RRSP multiplier
00% ---- 1.00
10% ---- 1.11
20% ---- 1.25
30% ---- 1.42
35% ---- 1.54
40% ---- 1.67
45% ---- 1.82
50% ---- 2.00
55% ---- 2.22

Damn, I heard about "tax deferral advantage", but never did the math before! That's fucking huge.

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Last edited by JHVH : 10-29-4004 BC at 09:00 PM. Reason: Time for a rest.

BonesCPA

My numbers were a simplified calculation that just showed the value of $10,000 invested at 10% for 10 years taxed and untaxed on the earnings. I didn't get into taxing the original $10,000 nor the effect of paying tax upon "maturity" of the investment. I didn't check your math, but it seems accurate.

The bottom line is, you generally end up with more going with a tax deferred option comparable to a taxable investment. (And don't forget, most taxpayers are at a lower rate when they retire - assuming you are taxed at marginal rates, not fixed ones.)

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Back into hibernation.