Who Doesn't Love Easy Money?

I was reading something this morning and came across an offhand comment that stopped me dead in my tracks for a moment or two. What gave me pause was a statement along the lines of "Back in the 1970s, when IRAs (Individual Retirement Accounts) were first introduced and took awhile to catch on..." First off, I hadn't realized that IRAs - the American counterpart to our Canadian RRSPs (Registered Retirement Savings Plans) - had only been around since the 70s, but more shocking to me was the notion that they had originally received a lukewarm or even cool reception from the general public.

Then I started thinking about some of the uninformed comments I've heard about RRSPs just in the time that I've been working (mid-80s onward):

• "They're a government money grab!"
• "I'd never contribute to one because I don't want to lose control of my own money!"
• "RRSPs are just a form of taxation."
• "I can't afford to put anything into my RRSP; besides, there's always the Old Age Pension and Canada Pension Plan."
• "What's the difference? Tax me now or tax me later. There's no incentive."

Now, I spent my first fourteen years of full-time employment working for a bank, so probably I'm not only better educated about retirement plans than the average person, but I also tended to hang out with other people who understood them even more than I did, like my wife.

Even so, I'm still amazed when I encounter someone who's anti-RRSP. I can understand if a person's hazy about some slightly more esoteric aspect like the value of a spousal account, or why starting contributions early in their career makes such a difference. Those are a far cry, however, from thinking that RRSPs are a scam!

I think part of the reason why there are still people so willfully ignorant on this topic was also touched upon in the book where I encountered the IRA reference. The point was made by the author that tax breaks were traditionally something that only wealthy people could ever take advantage of. In fact, for decades, the term "tax break" was almost synonymous with "loophole for the rich." Some folks may still make that association today, or have at least formed a negative association with RRSPs from that original connotation.

Then there's the fact that the money is "registered," with a set of rules placed on what happens when you go to take it out, that probably doesn't sit right with some people. After all, the argument goes, if it's my money, why can't I take it out whenever I want? And of course, the answer is: you absolutely can withdraw the funds anytime you choose, but you may end up paying the income tax on it that you never paid originally. That seems to be a tough concept for those who don't get RRSPs. And if you can't get your head around that, then no wonder you'd shy away from them!

I remember having a conversation with someone a few years ago on this subject, and heard the "I can't afford to..." opinion come out. I quickly fired back with, "How can you afford not to?" That of course got a skeptical look in response, like I was one of those infomercial snake oil salesmen who claim you can work just 10 hours a week and make $100,000 per year in the process... So I asked the other person if they'd have some money to invest in a stock, if they were guaranteed to get a 40% return the first year, followed by normal returns in subsequent years... as long as they left it there? The answer was, "Oh, sure, but stocks aren't guaranteed, and things that are don't give nearly that kind of return." Then I had my opening! I have no idea if that person ever did invest in an RRSP after we finished talking, but I gave it my best shot.

In case it's not obvious, I love that Canada has RRSPs! Vicki and I should end up retired (or financially able to retire) in our mid-50s and mid-40s, respectively, largely thanks to the money that has grown in our RRSPs (and company pensions) and the tax money we saved as we contributed to them. I have this idea about slowly drawing our money back out of the registered accounts (and into just regular savings) during the years when we're not working but aren't yet officially retirement age. Why? So that we can get some of it back at a very low income tax rate, by using the graduated tax system to our advantage. Imagine putting hundreds of thousands of dollars into RRSPs with a tax break of 46%, and then taking it out while only paying tax at a 0 - 15% rate! How sweet is that?

In summary, RRSPs (and IRAs): good! People who are suspicious of RRSPs: silly!