If you believe the hype, every adult Canadian should be maximizing their RRSPs through some kind of monthly pre-authorized chequing plan.
However, it’s worth noting that some people will probably be better off not investing in an RRSP at all. And, for many others, they’re still likely a low priority.
Is an RRSP your best fit?
If you're in a higher tax bracket, then making the maximum RRSP contribution as early as possible should pay off. But for many middle-income earners approaching retirement, the case is not as clear.
As well, the addition of the Tax Free Savings Account a few years ago has muddied the waters even further. Ideally, you're looking to invest in an RRSP when you're facing a high marginal rate and then taking it out when you're subject to a lower tariff. If it looks like it's going to be the other way around, you're not going to be better off in the long run.
That’s why many investors in the lower tax brackets – roughly $39,000 in Ontario – may have much less to gain from making an RRSP contribution than they think, particularly as they get older.
When you should consider other options
Potential buyers who are less well off and expect to receive the federal Guaranteed Income Supplement – currently available to Canadians earning less than $16,560 a year and couples with joint incomes under $21,888 – should probably think twice about RRSPs, for instance.
That’s a fairly large group since roughly one third of seniors can expect to receive some sort of government income supplement, according to retirement researcher Richard Shillington. And, if you have no company pension and less than $100,000 in retirement assets, you’ll likely be among them, he estimates.
For these low-income retirees a bit of extra income from RRSPs can actually erode their standard of living. That's because it counts against their GIS, which is reduced by 50 cents for every dollar of retirement income. And they'll likely also lose out on other benefits like rent subsidies, drug benefits, home care and social aid programs as well.
This group should not only forego putting any money in but should also consider cashing out so there's nothing left in their plan by age 65, he suggests. The tax paid each year could otherwise be offset by the additional benefits, depending on your specific situation.
RRSPs and small businesses
There are other circumstances where an RRSP is probably not your number one priority. For example, many small business owners actually register fairly modest incomes year over year, preferring instead to boost the value of their businesses.
The conventional wisdom has generally been that you should take a salary from the business to maximize RRSP contributions, and then consider a different combination of business income after that.
But, according to Jamie Golombek, CIBC's managing director of tax and estate planning, most business owners should think twice about this RRSP strategy and instead consider sticking with dividends, leaving any excess cash in the company where it can be reinvested. After crunching the numbers, Golombek found that skipping the RRSP left business owners with more after-tax cash.
The bottom line: RRSPs are not always the no-brainer they’re advertised to be. Be sure to talk to someone in the know before you jump in.
