Aspects of RRSP/RRIF

Keep in mind that when you put money into the Registered Retirement "Savings Plan", while you in effect decrease your earnings now to save tax and get a refund in your present days, you will have to pay the taxes in your retirement for a long time at ever increasing rates.

That is the deal. You save now and you pay later in the RRIF or Registered Retirement "Income Fund".

The key word is INCOME. What happens when you have INCOME? You pay TAXES.

The moment you convert your RRSP to a R.R.INCOME FUND, you must by law, take out as income a 'Minimum' of the savings money every year, whether you need it or not and pay tax on it. The minimum goes up every year once you start. Remember this

So in retirement you have the pension from work -if you were lucky enough to have one, and perhaps it pays you $400- $700 per month.

Then you have Old Age Security from the Fed at perhaps another $400-$600 per month and if you live in Quebec, you get the Quebec Pension Plan at another $500-700 per month.

So, $700 + $600 +$700= $20,000 per year not including any other savings you have inside an investment that is not REGISTERED. This will be taxed at a marginal tax rate of approx 35% or more.

Let us say you are age 71 and you now have converted the RRSP to RRIF.

You must take out from the RRIF a minimum of 7.38%.

Let's assume you have managed to save in this plan $200,000.

Then $200,000 x 7.38%= $14,760.

This amount must be taken out whether you like it or not and you must add it to the other income of $20,000 and pay tax on the increased amount.

There are other factors to be considered which I'll write about later. But the key question to you is,...

" Do you understand what is going to happen later if you use the RRSP as a savings device now?"

Good resource articles are in the Financial Post by Jonathan Chevreau (Wealthy Boomer).

He has two articles: Are You Saving Too Much? (Lower Targets) and the second is The RRIF Rebels. The articles are in the Financial Post Saturday Jan 29 2011 and can also be accessed at financialpost.com.

The minimums are :

age 65 = 4.17%

age 70 = 5 %

age 71 = 7.38%

age 72 =7.48%

age 73 = 7.59%

all the way up to age 99 = 20%

And just think, inside the RRIF, your invested money keeps growing even though you have only taken out the minimum.

Maybe we should consider how much should really go into the RRSP and how much should be saved outside it ...

say in a in the Tax Free Savings plan where you have $5000 you can save for year 2009, another $5000 for year 2010 and another $5000 for 2011 where even if you take any out, you pay NO TAX! That's right if you have not started for 2009 or 2010, it can all be added up in 2011 to $15,000, if you have that much to put in. You can put in less, but $15,000 is the maximum until next year if the Fed decides we can do it again.

Not only that, if you took any out, you can replace it at no extra cost.