Is The RRSP Still Worthwhile?

by Mike Holman

One of the big benefits of RRSPs is that when you withdraw the money, you don’t necessarily pay the marginal tax on the withdrawals but rather the average tax on the amount you withdraw.

For example if you withdraw $40k from your RRSP and you don’t have any other income source then you will pay only the tax payable on $40k which works out to a lot less than your marginal tax rate. If you have any income such as CPP and OAS – let’s say you get $12k per year from those, then the tax on the rrsp withdrawal will be the taxes payable on your income from $12k to $52k which will be more than the first example but still a lot less than your marginal rate.

What if you make a lot of money from your other income sources? In that case, the taxes due on the rrsp withdrawal might just end up being your marginal rate. If you are withdrawing your rrsp money and it’s all being taxed at or close to your marginal rate, is it still worth it?

You need to look at your own scenario and try to decide if it’s worth while or not.

Two main benefits of RRSPs:

1) The possibility of paying less tax on the withdrawal amount than the tax that was deferred on contribution.
2) No tax drag because of taxes on dividends, capital gains and interest.

Some common situations where RRSPs will probably have lesser value:

Defined benefit pension - if you work for the government or a company that has a good DB pension then the pension will probably put you into a moderately high tax bracket. If that is the case then you aren’t getting as much benefit from the RRSP since the tax you pay on the withdrawal might be the same or even higher than the tax you deferred when you contributed. You will still get some benefit from the fact that there is no tax drag in the rrsp. Another consideration is potential government clawbacks on your OAS (Canadian government benefit). This is one of those situations where you will probably be better off using the new TFSA account.

Low income - This is worth a post of it’s own but if you don’t make much money and can still save then the TFSA is a better choice than the RRSP.

Alternative income – If you have an alternative income planned for retirement such as dividend stocks (Derek Foster method or Smith Maneuver) and/or rental properties or any other income sources then they have to be considered as well. This is similar to a defined benefit pension in that if this money puts you at a reasonably high tax rate then any RRSP withdrawals will be taxed at a high rate and you lose part of the benefits of the RRSP.

More information on the TFSA

Benefits of the Canadian tax free savings account

Tax Free Savings Account (TFSA) Basic information for Canadians

Comparison between Canadian TFSA and American Roth IRA

Tax Free Savings Account refresher for Canada

ING offers TFSA refresher for Canadians

Is the RRSP still worthwhile because of TFSA accounts?

Using the Tax Free Savings Account (TFSA) for Canadians as an emergency fund

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