Sunday, April 17, 2011

No More RSPs For Me

Big Pile of Locked-in Money

I do not enjoy giving the government my hard-earned money. Before I even see my paycheque the government has taken their cut which amounts to about $3,000 a month. As if that wasn't enough I pay huge taxes on just about everything I buy from gasoline to groceries. GST, PST, and now HST. Oh, I'm not done yet...there's also all the other little or not-so-little fees throughout the year for things like a fishing license, a new sticker for my car's license plates and so on.

So, I try to find ways to hang on to more of my money hence I've been a faithful contributor to an RSP account for over 20 years. Because my employer takes off a big chunk every month for my teacher's pension I haven't had a ton of contribution room in my RSP each year therefore I don't want to lose a lot more of my money to withholding taxes when it's time to withdraw.

Yeah, here's the kicker. Putting money INTO an RSP really helps out at tax time - I've gotten some juicy refunds over the years. However, I didn't do the smart thing and reinvest that refund - if I had I'd be sitting on a pretty nice cushion of savings right now. No, being a single parent meant I used that refund to catch up on bills, buy my daughter a new pair of ghillies for her highland dancing and pay off credit cards etc. 

BUT, using another highland metaphor - EVENTUALLY YOU HAVE TO PAY THE PIPER!!  Yes, the government was nice to you when you put your money IN, but when you take it OUT they want more than their fair share.  See chart below for taxation rates depending on the amount you withdraw.

Withholding Taxes

Funds withdrawn from an RRSP will be charged withholding taxes. This amount must be held back by the plan administrator and remitted to the government on your behalf.
Effective January 1, 2005, the following withholding tax rates apply:
Amount of RRSP WithdrawalAll Provinces Except QuebecQuebec
Up to and including $5,00010%21%
$5,000.01 to $15,00020%26%
More than $15,00030%31%
You will receive a T4 RRSP receipt for any funds withdrawn during the year showing the amount to be included in your taxable income and the credit for the withholding tax.
YIKES, right? Just think a minute. $15,000 x 30% = $4,500!!! Whoa Nellie!!
My plan, then, is to only withdraw $5,000 per year so that I pay the lowest taxation rate of 10%. So for every $5000 I withdraw I will only receive $4,500. HOWEVER, that's not the end of the story unfortunately. The gov't has a mighty long arm here in Canada and when TAX Time rolls around again the next year I will have to declare that $4,500 as income because when I put it into my RSP it was DEFERRED income. Soooooooooooo if my income is too high the gov't will take some more of my $4,500. It's so frustrating!!!
So I have a plan. You know me, I've always got a plan. I will retire in June 2014. The following year, 2015, I will withdraw $5,000 from my RSP and put it into my Tax-Free Savings Account (TFSA).  My income will be drastically lower due to living on a reduced pension so HOPEFULLY I won't have to pay any more tax on my RSP withdrawal come tax time. 
I will put off collecting Canada Pension until at least age 65 in order to keep my income lower. Once I've got all of my money out of RSPs and into TFSAs I'll start to collect my Canada Pension Plan which will be a higher monthly amount than it would be if I started collecting it at age 60.
So I can no longer put any money INTO RSPs as it's going to take me up to ten years to withdraw my $$ at $5,000 per year. From now on my savings will go into my TFSA, so I'm really, really hoping that the contribution rate of $5000 per year gets doubled to $10,000 per year after the Federal Election.
Other factors in my decision:
  • I want to have the control over my money, not the gov't (yeah, right!)
  • I want to have access to my RSP funds in the years before I'm eligible for OAS (Old Age Supplement) and before accessing my CP (Canada Pension Plan). Once I hit 65 I will be receiving CP & OAS as well as my teacher's pension. It will be the years from 58 to 65 that will be the leaner years, income-wise thus making it the ideal time to withdraw funds from my RSP and keep tax rates at their lowest. (Not that 10% is low by any stretch of the imagination!!)
So that's my story and I'm sticking to it! I hope.


Christy said...

As a teacher I understand your dilemma. It is possible that I will taxed at a higher rate when I withdraw my RSP's. I've debated whether it would be worth "retiring" a year early - and living on my RSP's for that year and therefore not having to pay the early retirement penalty. The other option to consider is income splitting your pension with your spouse. My husband will not have a pension so I think that will help to reduce the taxes we pay. Since I still have 20 years to go, I guess I have time to think about it!
As for the increase in TFSA - Harper says he will increase that limit once the deficit is reduced - in 2015 or so. As far as I understood it won't be implemented right away. Sorry.

Jane said...

Oh, that Steven Harper - there's always a catch isn't there?! The income-splitting is a great idea!
Thanks Christy!

Anonymous said...

guess I wont' look into moving to canada LOL! ya'll don't have it any better plus it's freezing up there! I've had the a/c on off and on this past month or two! *ducking*!


Sharon said...

Holy moly that's a lot of taxes! I guess there is a trade off between getting healthcare and not, you guys are paying for it one way or the other! I like your plan, and having a pension sure will help!

Anonymous said...

why is Quebec so much higher on the lower amounts?!


Canadian Saver said...

I was wondering too about the increase from $5,000 to $10,000! Isn't going up for sure to $5,500 next year though?

This sounds like a GREAT plan, Jane, very well thought out! I'm beginning to second guess the whole RRSP thing................ yes the tax refunds are great now but the paying later won't be so good :-(

Girl Makes Cents said...

Good food for thought. Last year my RRSP contribution really saved me from having to OWE I think. So for now I will continue to add some. It's not a lot, but it will help.

~Carla~ said...

As long as the governments pockets are well padded that's all that really matters isn't it?! :P

Good luck reaching your goals!!

Jessica07 said...

Yeek. That's a lot of taxes going to your government per month. Do they even need to tax anyone else? LOL. Just kidding.

Johanna said...

Jane I think you can roll your RRSP's into RRIF's If I understand it correctly you then have to take out a minimum amount each year BUT it is just taxable income not subject to the with holding tax.
Here is a link talking about it,1608,CID7261_LIDen,00.html

Tax is withheld on amounts withdrawn over the minimum.
I don't fully understand how it works so you should probably talk to someone who knows