A Scotsman’s Nightmare

July 1st, 2013

I was born in a small town outside of Glasgow in 1946. My parents emigrated to Canada in 1948. I have recently been dealing with clients that are very close to retirement who have issues that greatly upset my genes.

The first issue is unused RRSP contribution room. The record for unused room, so far, is $106,000 but amounts of 40, 50 and 60 thousand are distressingly common. The problem is that these people are walking away from sizeable amounts of money.
Here are the numbers for a taxpayer in Ontario in 2012 who chooses to not make a $1,000 contribution to their RRSP.

1000 RSP

The analogy is that you are sitting in a chair and the floor is covered in $100 bills. You are making the decision not to lean over and pick up every bill within reach.

The second issue is retiring while in substantial debt and needing to withdraw money from registered funds (RRSP’s, LIRA’s, RRIF’s or LIF’s) to pay down the debt. All the amounts withdrawn from registered funds are taxable. Again here are the numbers for a taxpayer in Ontario in 2012 who withdraws registered money to pay down a debt by $1,000

RSP Withdrawl

The analogy is that you are sitting in a chair with a pile of money in front of you and you are throwing hundreds of dollars out of the window.

I listen to the debate about increasing CPP benefits. A small dose of “financial hygiene” would have a significant impact on retirement incomes for people that do not use their RRSP room and that go into retirement with large mortgages.