The book “Free Parking” by Alan Dickson makes the contrarian case that for low-income Canadians, saving in an RRSP is futile. All it does is boost your income after retirement and cut into the various income supplements available to seniors.
After factoring in the lost income supplements, some seniors will get to keep very little of their RRSP withdrawals each year. There are also other types of benefits based on income that make the situation worse.
But, things are likely to change with the new Tax-Free Savings Accounts (TFSAs). If the TFSA rules end up as advertised, even low-income Canadians will benefit from saving in a TFSA. It’s not clear that this will actually change people’s money saving behaviour, but at least the incentives are better.
But, this will only last as long as TFSA withdrawals aren’t used to reduce income supplements and other means-tested benefits for seniors as I argued here.
It would be interesting to see an updated version of “Free Parking” to see how the author thinks the TFSA changes his recommended strategies.
I agree, for low income Canadians, what's the point, other than the tax-free compounding. But low income Canadians likely won't have much headroom anyway, and even if they do scrape together the money, the tax free compounding on peanuts is still going to be in the realm of peanuts. The TFSA isn't going to help in that area either, but will help in terms of keeping income low when cashing in. Unless they change the rules of course.
ReplyDeleteI think that the low income individual would be better off investing the RRSP money into themselves. Find some way to increase education or train for an area that simply pays more.