RRSP Season Again

Every year when RRSP season rolls around I question whether I should dedicate another column to this same topic. Surely by now everyone knows how RRSPs work right?

Surprisingly, after over 60 years of existence, the RRSP program is still widely mid-understood and many common myths persist.

In the past few years, we’ve seen an increase in commentary surrounding the lack of benefits of RRSPs and we’re seeing more Canadians eschew RRSP contributions in favour of TFSAs.

For some people, the TFSA program may in fact make more sense but many others should not be avoiding RRSP accounts simply because they don’t understand them or get bad advice.

So, let’s look at some of these common myths and the reasons why Canadians are avoiding RRSP plans.

Myth #1 – A recent poll showed 39 per cent of Canadians believe that RRSPs are pointless because you’ll pay back all of the savings in taxes anyways. Although you do pay taxes on RRSP withdrawals, most investors will pay less tax and end up farther ahead by putting this money into an RRSP since their income in retirement will be less than while they’re working.

Even if you pay the same tax rate during retirement as you do while working, your “worst case” is getting the same net amount as you would with a TFSA so you’d get a similar tax free rate of return.

All other things being equal, an RRSP contribution is typically better than a TFSA one (better = you’ll have more money net in your pocket in retirement) if you’re income will be lower during retirement. RRSP vs TFSA will be a wash if you expect to be in the same tax bracket during retirement and the TFSA option will generally win out if your income is expected to be higher.

One big catch is what you do with the tax refund you receive after making the RRSP contribution – if you re-invest the refund into the RRSP you end up taking full advantage of the program’s features but if you use the refund to go on a trip or go shopping, you’re really missing the point.

Myth #2 – Many people feel that they don’t have enough money left at the end of the year to put some aside in an RRSP. While balancing a budget is certainly challenging, you really can’t afford to NOT put money away.

A Certified Financial Planner (CFP) professional can help analyze your budget and find out what areas can be trimmed or cut to make space for retirement savings.

While paying off debt is often at the top of the priority list for many Canadians, doing so in place of saving for retirement doesn’t always make sense. High interest debt such as credit cards should take priority but neglecting your retirement savings in favour of paying extra onto a mortgage is often the wrong move.

Likewise, money being allocated to items like RESPs (education funds) for your kids might seem like the right thing to do but those funds should often be diverted to RRSP accounts instead if you’re unable to do both.

Myth #3 – There is an un-warranted concern by many of saving too much money in an RRSP since they fear a large tax bill when they die. While the market value of your RRSP or RRIF does in fact need to be included as income on your terminal tax return, there are numerous exceptions.

Your RRSP value can potentially be rolled over to a surviving spouse, a financially dependent child or grandchild or an RDSP (disability) savings plan. More likely, you will draw down on your RRSP values over many years of retirement anyways.

Many (most?) Canadians still don’t fully understand the tax consequences and planning opportunities that exist with the RRSP program. Don’t let unfounded RRSP myths or advice from un-informed people keep you from maximizing your RRSP savings opportunities.

And don’t allow missing this year’s “deadline” keep you from getting your retirement savings plans in order. March 2 is a good of day as any to start yourself on the right track.