A Cure for Overtaxitis
Dateline: 01/12/98
Revised: 01/27/00
I wrote this article back in 1998 and it remains valid today. I've revised the Net Links (and added some) where appropriate, but the tax rates mentioned were rates in effect two years ago. They have changed little since then.
Where can you invest and be guaranteed a 40% return on your money in a few months? Investing in an RRSP! That’s where! (Assuming you’re an average middle class person in the 40% marginal tax bracket and contribute in February.)
Canada’s Registered Retirement Savings Plan has been around for over forty years (It was established in 1957). It’s been around longer than the Canada Pension Plan. And according to Garth Turner, former Minister of National Revenue and current investment guru, it is the single best way of building up your retirement nest egg.
Why is that? Because Canada has an extremely punitive tax system. Make over $60,000 and, incredibly, you’re considered rich in this country! (At least by the government.) At that income, the highest marginal tax rate, 53%, kicks in. The rates vary from province to province and range from a low of 44.3% in the Northwest Territories to a high of 54.1% in British Columbia. 53% is the average. If you’re making between $29,500 and $60,000 your marginal tax rate is about 40%.
By contrast, the United States’s top marginal tax rate is 39.6%! Even lower than our second highest rate. And it doesn’t kick in until your income is $256,500! Think about it. In the U.S. you don’t get taxed at the 40% marginal rate until you earn a quarter of a million dollars a year. In Canada, it’s at $29,500! And at $60,000, the bloodsuckers in Ottawa take over half of each additional dollar you earn.
The best way Canadians can save money and plan for their retirement is to save on taxes. But only a very few people take advantage of the tax savings opportunity afforded by the RRSP. In fact, many don’t save at all. A 1996 survey by Deloitte & Touche showed that 42% of Canadians save less than 5% of their incomes. And half of those save nothing! The survey was taken on the Internet and the respondents all had solid middle class incomes.
Counting on CPP?! No person today more than 10 years away from retirement should count on a single dollar in public money in his or her senior years. -
Malcolm Hamilton, |
With people living longer, the Canada Pension Plan likely to be phased out or go belly up, and almost half of Canadians expecting to retire with a net worth of less than $250,000, there is a crisis looming. If you're expecting the CPP to bail you out, forget it! Malcolm Hamilton of pension consultant William H. Mercer Ltd. says, "No person today more than 10 years away from retirement should count on a single dollar in public money in his or her senior years."
Many people simply will not be able to retire. They’ll be spending their old age working at McDonald’s or as security guards to make ends meet. It’s shocking and very sad that so few people are willing to take an interest in their future. It’s not difficult to do, and I hope this article will give you some resources to work with.
Continue on to Part 2: RRSP Resources on the Internet