Should You Put Money into Your RRSP?

Many of our clients come to us initially with the goal of putting money into RRSP’s, which they expect they will use once they get to retirement. While it often makes sense for at least some of your portfolio to be invested within an RRSP, it is not always the best option for your savings when all things are considered.

RRSP’s do have some advantages. When you deposit money into your RRSP (up to 18% of your income plus unused contribution space from previous years), you receive a deduction from income for tax purposes. Once invested within your RRSP your money will grow on a tax deferred basis until you withdraw it, at which point it is taxed as income.

As I have mentioned before in my blog posts, as the boomers retire they are going to be living longer, but not necessarily healthier lives. We will have less people contributing to the system and more taking out. At the end of the day if nothing changes, there will be a shortage of money available for the government to pay for all of the services we are used to.

“Even if the province wasn’t facing serious economic pressures, the health care system would still need to transform to address the coming demographic shift. Today, health care consumes 42 cents of every dollar spent on provincial programs. Without a change of course, health spending would eat up 70 per cent of the provincial budget within 12 years, crowding out our ability to pay for many other important priorities.”

Ontario’s Action Plan for Health Care. (Ontario 2012, p. 5)-

Based on this coming demographic shift, I often ask clients, “Do you think that tax rates will be higher or lower in the future?” Almost everyone agrees taxes will be going up. We have already seen it happen in the last year. The top marginal tax rate is now over 53%!

What does this have to do with you putting money into RRSP’s? Well the idea of putting your money into an RRSP is that you take the tax deduction when making contributions in your income earning years and you withdraw the funds and pay income tax in your retirement years when you should be in a lower tax bracket. But if tax rates have increased by the time you retire, you could be paying more income tax than you planned.

Additionally, in retirement you might have other taxable income such as CPP, OAS or a company pension, which along with money coming from your RRSP (which would then be a RRIF) will increase your overall taxable income, pushing you into a higher tax bracket. Aside from more taxes, this could also create a claw back on your Old Age security payments.

The good news is that there are other tax planning tools available! As our good friend Mark Halpern of WEALTHinsurance.com reminds us, there are 4 tax shelters left in Canada:

  1. Your Primary Residence
  2. Lottery tickets (While I should not need to say it, don’t make this your retirement plan)
  3. Tax Free Savings/Investment Accounts (TFSA)
  4. Tax Exempt Life Insurance Products

On top of the TFSA or Tax-Exempt Life insurance there is what we call Corporate Class Mutual Funds that will allow you to defer the tax when you make withdrawals on non-registered investments.

RRSP’s still play a part in planning for your retirement, but it is important that you spend the time with your advisor to make sure they understand your planning to date, your entire financial picture and your goals moving forward short and long-term. This will allow them to work with you in order to make sure you are investing your assets in the most tax efficient way moving forward.

Please contact us for additional information or to have us help you review your portfolio by e-mailing joseph@curryfinancialgroup.com or calling 1-866-445-4424. If you want to be added to our blog list to receive updates, sign up on the right side of this page.  I look forward to continue helping you and your family.

All the best,

Joe