Comment on RRSP savings October 30, 2017

I was just reading some blog comments about RRSPs. Lots of people are adamant that RRSPs are a bad way to invest. There was a complaint that the tax rate on death of the last surviving spouse was 50%. Truly that is a a heavy tax rate. But the complainer probably fails to understand the math whereby something close to 40% of the RRSP was contributed by the government in the first place via the refund (and growth on the refund). We should always be aware that the taxman effectively owns about 40% of our RRSP. But our own 60% share gros tax free and there is a huge benefit in that over time.

I won’t go through all the math but RRSP investing can be shown to be precisely equal to TFSA investing on your share (net of the refund) of the RRSP if the marginal tax rate is unchanged. (Say 40% at time of contribution/ refund and 40% at withdrawal). That being the case and the TFSA being tax free, the RRSP was also tax free growth on your net contribution.

My main observation is that once people get a certain idea about something like RRSPs then they tend to stick doggedly to that view. No amount of math or logic will change there minds. People tend to listen to views that agree with their current view. This is called confirmation bias and we all do it. In part we do it because we truly don’t have time to waste looking again and again at the same things. But we should all be aware we are have a confirmation bias and once in a while be willing to reconsider.

It is true that for some people, especially lower income people, RRSP investing is not the best idea. But any notion that it is a bad idea for middle and high income earners is simply false when the math is looked ito. But people tend to believe what they want to believe. If they have no RRSP savings, and probably little or no other savings than the idea that RRSPs are a tax bomb or a bad idea becomes quite convenient.