Posted by Tim Stobbs on January 23, 2008
It occurs to me that perhaps every one is going about their retirement planning in the wrong way. You see I’ve been looking at factors around retirement to determine which ones are really significant. Like what happens to your plan when your rate of return on your investments is only 6% when you planned for 8%. Also what happens if you save more and less. Yet after all this factors I’ve looked at your tax bill is likely the most important after all in Saskatchewan after the basic deduction you pay $0.26 in tax on every dollar you take from your RRSP in retirement.
So if you are a couple that uses your basic deductions in Canada you can take in $9600 each for a total of $19,200 with out paying a single dime in tax. At this point it doesn’t matter if the money comes from your RRSP account or interest on your savings account or even dividend income. You will pay no tax after you file your tax returns.
Yet another important feature of our tax system is that fact dividend income in the lowest tax bracket generates a larger tax credit than the dividend (if it is in a taxable account). So you can actually earn more than the basic deduct and still pay no tax depending on how careful you are to structure your investments in and out of an RRSP.
So this brings me to a wild idea I would like some feedback on. Why am I exposing myself to extra risk in the stock market when I can make a killing off my RRSP investment just on the tax brackets? For example, let’s say I get some help from a tax planner and structure my investments to ensure I pay no tax in retirement as long as I live a life with modest spending and I don’t have any debt. I can make 35% off putting money into my RRSP (35% is my current marginal tax rate – a future tax rate of zero) and making sure it keeps pace with inflation (for example, using real return bonds). If I can make 35% that way, why do I risk that in the market at all? I understand some equity exposure may be required to keep up with inflation, but honestly I could have 70% of my RRSP investments in real return bonds.
So what is really scary about this idea is if you apply it to those in the highest tax bracket. You could be making over 40% returns just on tax brackets alone.
So am I crazy or on to something? Please feel free to provide feedback and poke holes in this idea.