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Are rrsps's a scam to get more tax money?

Taxes! We hate paying them, so let's discuss maximizing tax deductions!

Are rrsps's a scam to get more tax money?

Postby cinnard » Wed Apr 13, 2011 8:14 am

Everyone has had the lesson about a 16 year old putting $5000 away and throught the miracle of compound interest ending up with $1000000.

So why is at good to shelter $500 worth of income today so that I can pay income tax on $5000 later?
It seems that the government has it pretty good here. They get to keep taxing you on you RRSP income until you're dead and once you're retired they say you MUST take out a certain amount every year, so that they can tax you on it....

Wouldn't it moke more sense to pay your income tax on $500 now, pay the capital gains each year on your investment earnings and say 'screw you' to the taxman when you retire?

Any financial whizzes out there?
Keep in mind I am referring to a modest income, not some rich, fat cat who wants to protect his millions.
cinnard
 
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Are rrsps's a scam to get more tax money?

Postby daveed92 » Wed Apr 13, 2011 8:27 am

The technical answer is that you are comparing apples to oranges.

To compare apples to apples, you must compare long term savings with annual taxation (of the change) and long term savings without annual taxation. The hands down, no contest winner is long term savings without annual taxation. That is what a RRSP account is.


The philosophical answer has two parts, while acknowledging that you have a mathematical point.

(a) It is not a scam in the main because it is encouraging people to do something they must do and are not generally doing. People like me (third generation to retire comfortably in my mid 50's) do not need encouragement. We save -- relatively -- massive amounts of our income every year, year after year, decade after decade in every form we can get. RRSP's are in large part a way to encourage the regular Joe to save more than they would otherwise do.

(b) What do the rich do? While fat cats can be just as stupid as the common man when it comes to money, they have more access to good advice on average. As a rule, we fat cats <grin> use tax advantaged accounts more than the average joe. Not likely if it isn't saving a bucket full of money in the long run.
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Are rrsps's a scam to get more tax money?

Postby felton » Wed Apr 13, 2011 8:28 am

The technical answer is that you are comparing apples to oranges.

To compare apples to apples, you must compare long term savings with annual taxation (of the change) and long term savings without annual taxation. The hands down, no contest winner is long term savings without annual taxation. That is what a RRSP account is.


The philosophical answer has two parts, while acknowledging that you have a mathematical point.

(a) It is not a scam in the main because it is encouraging people to do something they must do and are not generally doing. People like me (third generation to retire comfortably in my mid 50's) do not need encouragement. We save -- relatively -- massive amounts of our income every year, year after year, decade after decade in every form we can get. RRSP's are in large part a way to encourage the regular Joe to save more than they would otherwise do.

(b) What do the rich do? While fat cats can be just as stupid as the common man when it comes to money, they have more access to good advice on average. As a rule, we fat cats <grin> use tax advantaged accounts more than the average joe. Not likely if it isn't saving a bucket full of money in the long run.
So what's the alternative - PAY THE TAX NOW?? Given the choice of being taxed now, or being taxed later, I'll go for later.

The government will get 'its pound of flesh' either way. This should surprise no one.
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