10 February, 2022 Tax Planning

Should You Contribute to An RRSP?

We’re now in RRSP season. The deadline for contributions this year is March 1st. Every year around this time there is a frenzied rush from people to make sure they get their contributions in on time.

But should everyone make RRSP contributions? The answer is no. RRSPs aren’t for everyone, and many people contribute when they shouldn’t. It partly depends on your unique circumstances, financial plan, and goals.

For a lot of people, RRSPs are a must. Any contributions (up to certain maximums) are deducted from your taxable income. So, if you live in Ontario, and are in the top marginal tax bracket you will get back over 50% for every dollar you contribute. That’s like paying 50 cents for every dollar that goes into your RRSP.

The second main benefit of RRSPs is the tax-deferred growth of your investments. You don’t pay taxes on any interest or dividend income within an RRSP. You can also sell investments without worrying about capital gains taxes. This is a huge benefit for anyone, but particularly younger people. If you’re in your 20’s or 30’s and make an RRSP contribution, that leaves decades for your investments to grow tax-free.

Despite this, not everyone should contribute to an RRSP. As with anything, RRSPs aren’t a blanket solution, and should only be used if they make sense for your unique circumstances.

When doesn’t it make sense to contribute to an RRSP?

  1. Your first priority has to be to pay off any high-interest debt that you have. For instance, if you have credit card debt, you’re likely paying around 20% on the interest. That far surpasses any long-term rate of return you can reasonably expect from investing.
  2. If you’re in a low tax bracket, prioritize a TFSA over an RRSP. At certain tax brackets, the deductions for RRSP contributions aren’t worth it.
  3. What if you’re currently in a low tax bracket, but expect your income to rise over the next few years? Then you should still save to a TFSA instead of an RRSP. Once your income rises, you can transfer the assets from your TFSA to your RRSP.
  4. Lastly, if you expect your income in retirement to be higher than it is today then you should not contribute to an RRSP. You will be forced to withdraw it eventually and pay taxes on it.

RRSPs are a great savings vehicle for many, but not everyone. Deciding whether to utilize it should be part of a personalized financial plan that takes your specific circumstances into account. Everyone is different, and there isn’t a one-size-fits-all solution.

*The views and opinions expressed in this article may not necessarily reflect those of IPC Securities Corporation