The tax-free savings account unveiled in the budget this week is a wonderful gift for savers, a much-needed option for those already saving money in a tax-sheltered RRSP. Now you can hedge your bets and not have to worry about high taxable withdrawals in retirement.
About five years ago, I started writing columns about how RRSPs weren’t suitable for people living at a subsistence level. They might have put away money when they were young, thinking this would help them in later life, only to find that their RRSP income pushed them into a higher tax bracket and robbed them of some mean-tested benefits.
My thinking was informed by Richard Shillington, an Ottawa-based policy wonk who spent some time as a resident academic at St. Christopher House in Toronto. He talked to older clients of the social agency and found many weren’t getting the government benefits, such as the guaranteed income supplement, they were entitled to because they didn’t know about them. He also noticed the destructive impact of their RRSP savings.
He wrote a couple of papers for the C.D. Howe Institute, calling RRSPs a fraud on the poor — strong language for the venerable think tank. He urged Ottawa to tackle the perversity of the current system’s administrative rules, setting up something like the Roth IRA in the United States. If not, the financial services industry should run an educational campaign telling low-income Canadians not to buy RRSPs.
Only slowly and with difficulty is the word seeping out that that RRSPs are a poor savings vehicle for the GIS-destined. That RRSPs are a poor investment vehicle runs contrary to the monolithic financial advice that they are good for everyone. The small voice warning low-income Canadians must fight the advertising onslaught each January and February in RRSP-selling season.
The previous Liberal government warmed to the tax-free savings account. But despite encouraging words in each budget, they never did anything but study it. Much as I dislike Stephen Harper and Jim Flaherty, I have to admire their willingness to shake up the tax system in Canada and allow another option for savers.
The thing about life is that it’s so unpredictable. You never know where you’ll end up. You’re riding high today and then you you lose your job, get sick, have an accident or find yourself being an unpaid caregiver for a family member. Suddenly you’re going to food banks and lining up at the welfare office. You need financial resilience to bounce back from adversity.
Despite all the scary statistics about debt levels, many Canadians do put away money for the future. But their savings efforts should be rewarded, not punished by taxes and clawbacks that confiscate much of what they have set aside.
I often talk to middle-class people who regret their decision to save in RRSPs. They didn’t realize the taxes would be so high and the withdrawal rates so inflexible. Now they have a savings vehicle that won’t give them a tax deduction on the way in, but won’t penalize them on the way out. It never hurts to have more choices.
The Roth IRA is a popular feature of the U.S. tax and savings regime because it’s so useful, especially for young people. If you put pretax money into a savings plan at age 20 and leave it in until age 71 when you have to begin withdrawals, “you have been growing taxes for Uncle Sam for 50 years,” says a proponent.
So, let’s enjoy our $5,000 of tax-free savings in 2009 and wait for successive governments to increase the limits, as I’m sure they will (just as they did for RRSPs). This is one budget gift that will keep on giving.