Personal Investor: How the government can mess up your retirement
Of all the risks that could send our retirement savings into a tailspin, government policy is probably the most overlooked. One stroke of a pen could choke a well-planned income stream.
Government risk goes well beyond Wednesday’s Canadian federal budget. When investors become disillusioned with the promises of U.S. President Donald Trump and global markets fall in value, the stocks that fall are often the same stocks in our registered retirement saving plans (RRSP) and tax free savings accounts (TFSA).
Government risk will play an even greater role in our retirements as employer pensions transition from the safety and reliability of defined benefit to the unpredictability of defined contribution. Like it or not, many of us are being forced into becoming our own portfolio managers.
In Canada, government risk includes potential changes to the way capital gains on equities, or dividends are taxed. It’s not a direct issue if your savings are in an RRSP because capital gains and dividends are fully taxed when withdrawn, or a TFSA because they are never taxed.
But there is also a stealth risk if government deficits accumulate. RRSPs are based on the notion of tax deferral – don’t pay tax on contributions when you are in a high tax bracket, let it grow tax-free, and withdraw when you are in a low tax bracket. There’s no guarantee a revenue-hungry future government won’t tinker with marginal tax rates and take a bigger chunk of your RRSP withdrawal.
Even the TFSA could be vulnerable. As investments and contribution room grows, the government could see it as an untapped revenue source.
The good news is: we elect our governments. That’s why it’s important to keep tabs on how they are spending our money, and speak up when they are spending it wrong.