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Originally Posted by MazterCBlazter  |
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RRSP's are taxable income when they are withdrawn, do a comparison to putting your money directly into investments that pay immediate dividends. Sometimes it works out that overall you will have more money in your pocket due to the reduced taxes, plus you have that investment income, NOW, as small as it is, it will grow over time as you add to it.
It should be noted that some people I that live off their dividends looked into it and decided to avoid RRSP's altogether. |
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That's partly what I was getting at, but didn't want to edge too close to giving specific advice, not knowing much about the person -- risk tolerance, job security, desire to retire early (or not)... though this morning I'll throw that out the window.
Even though I make heavy use of RRSPs for myself (partly due to risk-tolerance issues -- even though dividend stocks are quite reliable, they are not fool-proof and not in a low-risk category), I can definitely see situations where saving in an RRSP is
not a particularly good idea.
If I were 25, with 24 years to go on a mortgage, with a secure job with a pension and good prospects for career advancement (great place to be!), the RRSP would be last on my list.
These would be my priorities, though they'd actually have to be dealt with concurrently to some extent:
- I'd retire any non-mortgage debt ASAP (except in the unlikely case that the interest rate is actually lower than the mortgage rate).
- I'd build an emergency fund of very safe investments, even cash despite piddling interest rates, in a TFSA. Purely rainy-day money with no expectation of any inflation-beating returns.
- I'd try to retire the mortgage ASAP.
- after the emergency-fund portion of the TFSA reached 6 months' expenses, I'd continue building it, but with riskier investments. One potential future use for this money could be RRSP contributions in high-income years, or a final push on the mortgage. Or just a source of tax-free retirement income, which in this case could be very substantial due to the person's age and long window for saving and compounding.
- if my income were high enough that I could max out the TFSA and make maximum pre-payments on the mortgage and have no other debt, only then would I worry about the RRSP. (Or rather, do a cost-benefit analysis of saving in an RRSP vs. building a non-registered dividend portfolio as you describe.)
- I would make one exception to the last point: if I had a serious expectation of going back to school in the next few years, I'd build the RRSP up to the maximum Life-Long Learning Plan amount (currently $20K I believe), but this would still be lower priority than the emergency fund and mortgage. (The benefit here is that you get your tax deduction now, tax-free use of the money for grad school, and then it's only taxed many years down the road.)
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