RRSP strategies - wrong advice in the media
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Thread: RRSP strategies - wrong advice in the media

  1. #1
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    RRSP strategies - wrong advice in the media

    I have decided to start this thread to post links to articles in the media that give commonly heard but wrong RRSP advice. These result from a wrong understanding of the RRSP's benefits, by all the official players in the industry and government and media. When you misunderstand the RRSP's benefits, your strategies to maximize those benefits will also frequently be wrong. I have published the math proofs and the conceptual model that explains the RRSP's net benefits at .....

    (i) The conceptual model of all the independent benefits/costs.
    (ii) Common decisions that will be decided differently because of the contrarian understanding.
    (iii) A spreadsheet for your own variable inputs, that calculates and deconstructs the RRSP net benefits

    I won't be re-arguing the information in these links - but just referencing their conclusions.

    edit Dec 2, 2015 It seems from the comments that I should give the complete list of Reasons/Excuses People Use To Dismiss the documents above. Needless to say I don't think any of these arguments has any merit in the least. Notice that no one at all has ever found any faults in my math, found any faults in the logic of my conceptual model, or offered any math to support the received wisdom.

    (1) The most common reason is because they simply refuse to read the evidence. This is sadly very, very, very common.
    (a) Some use the reason 'that I am a flake' and they cannot afford to waste their time. They are often proud of this stance and publicly state their refusal.
    (b) Some have a 'how dare you claim that everyone else is wrong' response. Yes, I do dare, and I am proud of daring. In my books being 'right' or 'wrong' is not determined by popularity. It is not determined by the credentials of any backer. It is determined by the scientific method.
    (c) Some refuse to read, even while claiming they have. Once you have read the paper it is easy to identify these people by their comments - which clearly indicate they have no idea what has already been argued.
    (d) Some take a passive aggressive approach and continue repeating the false claims while stating that .."I am not saying you are wrong". Either (i) they have either not read the material, or (ii) they have read the material, not been able to find any faults, but cannot admit they are wrong. Either way they are refusing to think.
    (e) Some believe that there are no absolute 'right' and 'wrong' statements about the RRSP's benefits. No claims need to be proven with math. Everyone can pick whichever selection of claims they want. This is probably a result of modern education systems where every participant gets a prize and 'we are all winners'.

    (2) The second most common reason to stop reading very quickly, is because people refuse to think conceptually. They cannot distinguish between the attributes of the RRSP itself, and their own personal cash flows and personal choices how/when to realize the RRSP's tax impacts. They don't accept that cash is fungible - that the cash in their wallet cannot be considered to have any history or source. They do not agree with the 3 premises listed on the SSRN paper's page 2. But the choices they make personally are not necessarily the same choices made by other people, and do not define the RRSP system itself. If they had continued reading they would have found that the 'Penalty From Delay In Claiming Deduction' factor provides the math that represents the effects of their personal cash flow choices.

    (3) A large number of people stop reading in the middle of the analysis of the 1st benefit (from sheltering profits) - because it presumes no change in tax rates between cont and w/drawal. They believe the RRSP's benefit comes from that change in rates. They seem to not have noticed their pet benefit listed in the table of contents, and never read far enough to see it is discussed next in line.

    (4) Many people fixate on the terms I use, and conclude that because they don't like the term, the math and concepts are wrong.
    (a) Some object to my claim that the different sources of net benefits are independent and ADD together ---- because some of those factors always reduce the net benefit, and should be said to be subtracted, not added. I could not care less. You can think of the 'Penalty From Delay in Claiming Deduction' as being a positive that is subtracted , or you can think of the Penalty as being a negative in itself which is added.
    (b) Some people stop reading when I first use the term 'Contribution Credit' because they feel it is a 'Tax Deduction' not a 'Tax Credit'. Therefore I must be an idiot. Of course tax deductions refer to adjustments to the income on which $$ of tax are calculated. Tax debits and tax credits refer to the actual $$ of tax - which are just percentages of the deduction. So it is not me who is the idiot.
    (c) Some object to my use of the term 'Penalty' for all those factors that are negative (reduce the net benefit). They use a dictionary giving only one usage (penalties are sanctions for breaking rules), and feel that any other usage is wrong. Of course they never offer any suggestion of a better word. And of course better dictionaries allow for my usage.
    (d) Some people try to dismiss all the factors, other than their own pet benefit, by dismissing them as only 'opportunity costs'. All financial choices result in your experiencing one outcome, and NOT experiencing another. So yes, one could consider the latter to be an 'opportunity lost'. But those outcomes are measured in hard cash wealth. If you want to end up with poorer because you dismissed a factor as only an 'opportunity cost', go ahead.

    (5) A large number of people refuse to acknowledge the difference between the mechanics of the RRSP system, and it benefits. They quote mechanics as if they are proof of benefits. They refuse to acknowledge that any cash going into the RRSP system must pass through all the steps before you can spend it - it is the net effect of all steps combined that matter. They refuse to admit that tax effects at one step are cancelled by tax effects at another step.

    (6) Many dismiss everything because they don't agree with the variable inputs used as examples. Somehow they cannot understand that once you have proved that A + B = C, it does not matter what A equals, or what B equals, because the point is that when added they always equal C.
    (a) Lots of people get irate when my example of the 'Bonus/Penalty From Tax Rate Change' used a higher tax rate on withdrawal. They have a lack of imagination and feel that is impossible. But who cares? The math calculation of the Bonus/Penalty remains the same and applies to any assumption.
    (b) A minority of people (thankfully) think they will be able to withdraw RRSP funds without paying any tax. Therefore they argue that the Contribution Credit to a Benefit. Yes the math does support that claim --- for only this particular assumption. It does not work in any other situations. It does not disprove my model. In contrast, my model works in all situations - even this one.
    (c) Almost all other variables used for examples have been used as reasons to dismiss my math - whether it is the # years to withdrawal, or the Asset Allocation percentages, or the effective tax rate on investment income, etc etc. People do not understand that when a model is correct, it works for ALL situations, with all assumptions, all variable inputs.

    (7) A few people object to any disclosure of the true benefits because they feel this makes the RRSP look less attractive (of less benefit). Most of these people start from the idea that there is no permanent sheltering of profits in an RRSP. They fail to look at the math showing just how huge this benefit is. They hear me refute the false claims, and presume this means I am saying there are less benefits. But no one should tell lies just to 'sell a product'. False claims should be attacked every time. The true net benefits of the RRSP are huge, and are sufficient to 'sell the product' truthfully.

    (8) Some people actually argue that the true benefits of an RRSP should not be taught, because they feel that in real life people do not actually realize those benefits. They fail to appreciate that any failure to realize those benefits is because they have made wrong choices - often because they were given wrong advice - which most always was because the advisor had a wrong understanding of the RRSP. The point of the advice industry should be to help people make the correct choices. To do that they need to correct their own understanding and correct their advice.

    Last edited by leslie; 2015-12-03 at 08:34 AM.

  2. #2
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    NEW - Mike Grenby in the NorthShore News

    This article is about the Asset Location AL choice - which assets are best held in RRSPs.

    The first error here is the idea that profits in the RRSP are taxed on withdrawal - so that its benefit comes from only 'deferral, and even that may not be a benefit because the eventual tax is at full rates (not the preferential rates of dividends and capital gains). But profits are not taxed, ever, in an RRSP. The RRSP's major benefit, the only benefit that everyone gets, is its permanent sheltering of profits from tax. This $benefit will always exactly equal the same benefit from a TFSA. The withdrawal taxes are an allocation of principal between the accounts two 'owners' - you and the government,, not a tax on profits.

    The second error here is the idea that the RRSP's benefit is relative to the tax %rate that would apply to the income - so sheltering highly taxed interest income is better than sheltering preferentially taxed dividends. In fact the RRSP's benefit from sheltering profits from tax is most strongly determined by the asset's growth rate, and time. The $ tax that would be paid in year one, does not determine the long-term benefit. Faster growing assets (higher total return) produce faster growing $profits and more $taxes, no matter how small the tax %rate (unless really, really small), given time.

    Yes the tax %rate does have an impact, but no one 'loses' the dividend tax credit. The tax rate used for the AL decision is the net effective tax rate. The DTC, capital gains reduction, any delay in claiming capital gains with long-term holds, lowers the effective % tax on common stocks but does not make it zero. And even with low effective rates common stocks can give bigger benefits in an RRSP. than low-yield Treasury debt.

  3. #3
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    My complaint is that most of these guys don't get the 'Time Value of Money' effect, namely.... would you rather pay $200 in tax now or $300 in tax 10 years from now. Depending on the ror, it is very likely that the '10 years from now option' is preferable.

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    NEW - Joel Schlesinger inn Winnipeg Free Press

    Quote: "Yet perhaps the biggest benefit is professional money management would help ensure their assets are invested in the right account -- be it an RRSP, TFSA or non-registered -- to create an income stream that is tax-efficient to make their money go further. For example, their dividend-yielding Canadian stocks would be mostly held in non-registered accounts because Canadian dividends and capital gains are taxed more favourably than interest from fixed income, and dividends and capital gains from foreign equities."

    This again is the Asset Location AL decision. He thinks the decision is decided by the tax % rate on the asset's income. But percentages don't pay the bill. $$ pay the bills. It is the tax $$ saved that decision the AL decision. And not only the $$ tax in year one, but the compounding tax savings over time. Unless the tax rate is 0% (which it is for dividends in the bottom tax bracket) it is the growth rate of the asset that determines the benefit of an RRSP over time. Given time, the higher growth assets will generate higher $tax bills no matter how small their tax %rate.

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    NEW - Jamie Golombek in the Financial Post

    "One strategy to consider if you turned 71 this year is making a deliberate, one-time over-contribution to your RRSP in December before conversion ........ You can then choose to deduct the over-contributed amount on your 2016 (or a future year's) return."

    This strategy is correct, but many readers may disregard the qualifying "if you turn 71 this year", and think "what a good idea for me". This strategy only works for people who do not have the choice to delay their contribution until that later date when they plan to take the deduction. For normal people, the delay in claiming a deduction comes with a growing penalty that equals the missing profit that would have been earned by the contribution credit during the period of the delay. This is covered in the SSRN paper http://papers.ssrn.com/sol3/papers.c...act_id=2616276
    Last edited by leslie; 2015-10-11 at 11:13 AM.

  7. #6
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    Quote Originally Posted by leslie View Post
    NEW - Joel Schlesinger inn Winnipeg Free Press Quote: "Yet perhaps the biggest benefit is professional money management would help ensure their assets are invested in the right account -- be it an RRSP, TFSA or non-registered -- to create an income stream that is tax-efficient to make their money go further. For example, their dividend-yielding Canadian stocks would be mostly held in non-registered accounts because Canadian dividends and capital gains are taxed more favourably than interest from fixed income, and dividends and capital gains from foreign equities."

    This again is the Asset Location AL decision. He thinks the decision is decided by the tax % rate on the asset's income. But percentages don't pay the bill. $$ pay the bills. It is the tax $$ saved that decision the AL decision. And not only the $$ tax in year one, but the compounding tax savings over time. Unless the tax rate is 0% (which it is for dividends in the bottom tax bracket) it is the growth rate of the asset that determines the benefit of an RRSP over time. Given time, the higher growth assets will generate higher $tax bills no matter how small their tax %rate.
    So if I have $5k that I am going to invest in fixed income and $5k that I am going to invest in RY shares, and I am going to put one of them into my non-registered account and the other into my RRSP account -> Which account should I put the fixed income into and which account should I put the shares into?

  8. #7
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    Quote Originally Posted by leslie View Post
    NEW - Jamie Golombek in the Financial Post "One strategy to consider if you turned 71 this year is making a deliberate, one-time over-contribution to your RRSP in December before conversion ........ You can then choose to deduct the over-contributed amount on your 2016 (or a future year's) return."

    This strategy is correct, but many readers may disregard the qualifying "if you turn 71 this year", and think "what a good idea for me". This strategy only works for people who do not have the choice to delay their contribution until that later date when they plan to take the deduction. For normal people, the delay in claiming a deduction comes with a growing penalty that equals the missing profit that would have been earned by the contribution credit during the period of the delay. This is covered in the SSRN paper http://papers.ssrn.com/sol3/papers.c...act_id=2616276
    I found this Jamie Golombek article very confusing and of limited applicability. I'd use the newspaper it is on to light the fireplace

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    I have made the same argument about AL. It doesn't make a great deal of sense to shelter 1.7% interest income while paying tax on 3.5% foreign dividend yield.

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    NEW - Kay Ng in Motley Fool

    Here the author repeats the false claim that profits earned in the RRSP are taxed at full rates on withdrawal. She makes the claim to put debt in the RRSP - probably as a result of this idea of full tax rates on both choices but the RRSP deferring that tax. But the RRSP's main benefit is its permanent sheltering of profits from tax. A $benefit that will always exactly equal the same benefit from a TFSA. The RRSP does not generate any benefit from 'deferral'.

    The second error is to conclude that capital losses are 'lost' inside an RRSP. In reality the RRSP protects from tax all profits (net of losses) over time, just like in a Taxable account you pay tax on all profits (net of losses) over time. It is illogical to advise NOT using the RRSP for stocks just because sometimes they will have gains and sometimes they will have losses. It is the net profit over time that matters. Since no one invests with the presumption of losing money over time (even when 'experimenting'), this is not a criteria for Asset Location.

    The third error is to advise holding Cdn dividend stocks in a Taxable account because of preferential tax rates on their incomes. This might be correct advise if all the room in registered accounts is taken up with foreign common stock, but the author does not specify that. If there IS any extra room, then Canadian dividend stocks should be in an RRSP in preference over low-yielding Treasury debt. The preferential tax % rate is of less importance in measuring the compounding value over time of the RRSP's income sheltering, than the growth rate of the asset.

  11. #10
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    The problem with most of the advice re RRSPs is that a lot of that advice made sense during times of higher interest and before the introduction of the TFSA. Lazy website contributors have be cutting and pasting that same advice even as interest rates approached 0 and after the TFSA became more useful as a savings vehicle.


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