Who Should NOT Have an RRSP?

Less than 40% of folks who can contribute to an RRSP will this season if we follow the trends of the past. And gobs and gobs of RRSP contribution room will go unused. It’s a travesty, such an opportunity being wasted.

Of course not everyone sees it that way. All the folks who consider an RRSP to be a bad idea – think of all the tax you’re going to have to pay when you pull the money out! – are leaving some folks confused as to whether an RRSP is a good idea or not. Maybe they should skip the RRSP and just go with a TFSA. It’s so confusing.

So who might NOT benefit from an RRSP? There are some people who might be better off focusing on a TFSA, but only if they fall into one of the following groups:

Low income: If you have a low income and it is taking all your money just to make ends meet, you might want to skip the whole guilt thing over not contributing to an RRSP. Look ahead a bit. If you’re going to be able to make do with the income CPP and OAS provide, then squirreling a way whatever you can manage in a TFSA would make more sense.  And if you’re going to have an income that lets you qualify for the Guaranteed Income Supplement ($15,888 in 2011, not including OAS), then using a TFSA will also work better for you.

Low tax rate: Claiming a deduction for an RRSP contribution at a low tax rate, piling up a stash of cash, and then paying more in tax when you cash out at retirement makes no sense. If you think you’ll likely always be at the lowest tax rates, go with the TFSA. But if you think that over time your income and tax rates will increase – Imma talkin’ to you young’uns – then go ahead and make your RRSP contribution and hold the deduction for when your taxes are higher and you’ll get a bigger refund. You can then use the taxes you save to pay down your mortgage or fund your TFSA contribution.

Old or pretty close to retirement: If you haven’t made any RRSP contributions thus far, and you’re only going to be saving a small amount ($5,500 or less), and you’re not in the highest income tax bracket, go with a TFSA.

Great pension plan at work: Having a great pension plan at work means you may find yourself already paying more tax than you want to. Having a whack of taxable income in an RRSP will be less than optimum. If you’re concerned about losing your OAS to the clawback, go with a TFSA instead of an RRSP.

For virtually everyone else an RRSP is an awesome idea. If you don’t fall into these four categories, don’t be deluded or confused into thinking you won’t benefit.  I believe an RRSP is still the single best way to save for retirement. I’ve had my RRSP since I was 22 years old and now that I’m heading into my “later years” I’m damn glad I had some foresight.

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Gail Vaz-Oxlade

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35 Responses to “Who Should NOT Have an RRSP?”

  1. What’s considered to be a “great pension plan at work”?

  2. I would also like to know how much of a pension plan is needed in order for it to be a better choice to put savings into a tfsa rather then rsp…….thank you!

  3. Good message Gail. I too believe that RRSP’s are not for everyone and have long thought that if you are in a low income bracket you need to weigh gov’t benefits versus your need to contribute especially if you are older and haven’t contributed. It can be complicated for the average person to figure out. The TFSA has been a boon to the low income person who may just manage to put a little away but if they put it into an RRSP they will find gov’t benefits cut too much. That being said I still think the younger you start contributing to an RRSP (even in a low income bracket) the better off you are since in most cases you will find your income rising and the power of compound interest will work in your favour.

  4. I think when looking at “to contribute or not to contribute” to an RSP, there are a few factors to consider which does not make it a simple easy answer.

    I think the post gives people a solid starting point, but you need to evaluate your situation and how it relates to the tax brackets and consider how this may change over your working life.

  5. avatar Christine Says:
    January 22, 2013 at 9:48 am

    What about if you have a ‘great pension’ at work now… but aren’t convinced it will still be ‘great’ (or there at all), in 30-35 years when retirement time comes? I already contribute to a TFSA, and can’t put more into that than I do. So, if not an RRSP for the extra long term savings, then what? Putting it into a regular bank account (even a ‘high’ interest one at 1.3-1.4%) for the next 30 years seems like as bad a decision as paying extra tax down the road.

  6. I think the point of the pension is that the pension savings count towards your RRSP limit, so you might not be able to contribute much, if anything, to the RRSP

  7. @ Oscar – a great pension is generally defined as a well funded defined benefit pension. considering that most Canadians do not have a pension, let a lone a defined benefit one, they are a rare breed.

    @ Christine – a TFSA can hold stocks, bonds, index funds, cash, and more which have historically returned far more than 2% over the long run. They don’t have to be just low interest savings accounts.

  8. Great post Gail. I think you summed that up very nicely for many people. It is crazy how many people (who are not in the lowest tax bracket) are not contibuting to their RRSP’s.

  9. I have a defined benefit pension through the federal government. I wonder if that is considered “secure” enough to forego the rrsp and concentrate on tfsa. Anyone hazard a guess?

  10. @ Momma – hell yes.

  11. The thing I like about contributing to an RRSP is it takes effort to take money out unlike a TFSA which I use for short term goals. I am one of those people that need the money taken out of my account so I dont spend it. What you dont see you wont touch. So even if it is not a smart tax decision for me it is a smart long term savings decision. Just a thought …

  12. I’m in a situation where my income is much lower now then it will be in 3-4 years when I return to work full-time. My plan is to keep putting into my RRSP’s without claiming them and then when my income is much higher I will claim those deductions to reduce my taxes. So, I have the best of both worlds, untaxed growth and future deductions at a high rate. (yes, I have maxed my TFSA!)

  13. I’m curious about the pension plan as well. I would appreciate a follow up blog to this because I’m very confused and seeing how others have posted related questions, it’s not just me. Gail, what would you consider to be a “great pension plan at work?” Also, like Christine said, what if the plan isn’t around in 30 years when i plan to retire. In a similar regard, what if you choose to leave your current employer with the pension plan or you are let go (jobs are fickle these days)? Should you prepare for a back up plan now by contributing to an rrsp or a tfsa while you have the extra resources to do so?

  14. To all those wondering about these “great pensions”.

    I have seen this from my mom and dad’s point of views. My mom, a teacher, has a very healthy pension plan. So much so, that by the time she goes to contribute towards her RRSP in February, she has usually already topped out the maximum contribution to her RRSP. This happens virtually every year. Inevitably, my parents use whatever extra income they have to help top out my dad’s RRSP – (he doesn’t have quite the healthy pension though he has one) so they can max out his deductions.

    Hope that helps clarify it for you.

  15. @Christine –> I have a “great pension plan”, but like you, I’m not betting the farm that it’s going to be there in 20 years when I retire. No way in hell do I trust that! (Ask the folks who used to work at Nortel.) The fact that so many Boomers are retiring in the next few years soon could completely collapse the systems, in my opinion.
    I still stash some in my RRSP and the rest goes into a non-registered investment account.

    I’m not sure I understand why so many people are worried (even here at work) that they’ll end up in a higher tax bracket. Heck, I want to be in the highest possible tax bracket by the time I retire. That means I’m stinkin’ rich, doesn’t it?

  16. I think another valid point to consider is whether your work offers some form of RRSP matching. If they do, and you don’t take advantage, you’re throwing away free money.

  17. Like others, I define a “great pension plan” as a well-funded defined benefits plan. I’m lucky enough to have one of those through my work with the federal government. To those who aren’t sure these plans will be around when I/we retire in 20-25 years – I’m slightly more optimistic, myself. Even if the Government of Canada decides at some point that it doesn’t want to offer a defined benefits pension to its employees, those who are vested in the pension now will at the very least get contributions returned – as such, it’s at worst forced savings and at best a pretty good guarantee of income in your old age. I’m not actually saving in an RRSP right now, though I have some unused room from previous years – instead, I’m slowly building up an emergency fund in my TFSA, and once that is fully funded, I will start investing through my TFSA – proceeds will be tax-free!

  18. @Chris—> I’m a federal employee as well and I agree with you. For me the pension is the only reason I stay, I would be an idiot to throw that away. I too just put money in a tfsa instead of rrsps.

    thanks gail for the post!

  19. The advisor at the bank recommended i open an rrsp even though i have a federal government defined benefit plan.

    I’m already contributing the max to my tfsa so I’m not sure what other options there are. Maybe a spousal rrsp or topping up his tfsa is the answer

  20. I’m a very low income earner (currently self-employed working just a little bit because of sickness). I’m currently in the process of separating from my spouse and will have some capital from that when he buys me out from our jointly owned property (probably around $120,000). I’ll also have a little bit of spousal support – but am not anticipating much. I hope to eventually get professional work when I’m a bit better but I don’t anticipate the salary being particularly high – probably around $40,000. I’m 50 this year.

    I’m looking to invest the $120,000 into pension investments but my question is where?

    I’m thinking TFSA first, then laddered GICs then RRSPs … would this be correct?

    Or should I be avoiding RRSPs completely as a low income earner?

    I do not intend to buy another property at any point – I’m just going to rent from now on but I’m trying to figure out where to set some money safely aside for my retirement.

    I do have a small UK pension and will be entitled to a small spousal RRSP as part of the settlement too but I’ve been in Canada for around 10 years now and I haven’t earned much since I moved here – we moved for my husband’s job (high income for him) and now we are separated I’m trying to figure out the best way to secure some financial security in my old age …

    I’m a very conservative investor and while I do envisage working when my health improves, I want to make sure that I don’t do anything to diminish the money I get from my settlement.

    As a couple we were talked into a spousal RRSP (with a major bank) when we first arrived here but it’s not done very well so I don’t want to go through a major bank for more mutual funds.

    I also would like to try to invest ethically … I was horrified to discover that the spousal RRSP is invested in Embridge as I don’t support that pipeline. I have recently discovered Libro and they advertise that they have certified financial planners that you can talk through your finances with – but I don’t know how independent they are?

    I’m trying to educate myself about pensions and investments – I subscribe to Moneysense and read lots of library books about finances … but the stockmarket seems like such a crap shoot … any advice on the questions I pose appreciated.

  21. Thanks Geoff! And to the other federal government employees, thanks for your point of view as well. Like Jodie, I will also definitely be staying with the fed govt for the pension! I got in early and can technically retire at 55….. “Technically” is the key term ;)

  22. I’ve had people tell me that I have an excellent pension plan (OMERS), but because I do not work a full year, I “lose” 2 months per year into my pension calculations… I would love it for Gail to do a blog on pension plans and explain how to calculate, etc… Even using the OMERS website and their calculators, I still have no idea what numbers I should be plugging in where. Help! And, it can’t be a great pension, because after working for 20 years, I have over $30000 left in contribution room, and I still have another 13 years until early retirement (if that’s even possible).

  23. @ Angela

    I have always found that Credit Unions offer the best rates and advice.

    The credit union that my family goes to have helped my mother with her retirement plan, as well as the best plan for my father. They are divorced with completely different circumstances. They catered to each person’s needs.

    They also handle my RRSP. I just have some GIC’s and savings right now.

    Not sure were you are located but the credit union is Meridian Credit Union located in Ontario.

  24. @Angela – You should also look into splitting the CPP credits you and your husband accumulated during marriage. If you request it, the government will do it – they add together the credits each of you accrued during marriage and spilt them down the middle. Sounds like this will benefit you since your husband earned more and has probably accrued more credits than you. Google “CPP credit splitting” for more information.

  25. @ Cas – it is a great pension because few Canadians qualify for any kind of pension AT ALL. (IE, the vast majority of workers who fund the government pensions, but that’s a different posting).

  26. @momma
    I got in early too! I started at 19 so I could retire at 54. But now I’m taking 5 years off to raise a family. During that time I’m not contributing to a pension. I need to find out what it will cost to buy back in. I’ve heard a lot. I hope it doesnt mean an extra 5 years of working:(

  27. @Jodie
    I am currently on mat leave and debating buying back my year…at this point what’s working another year when my husband won’t be retiring at 55 either. I heard to buy back a year after mat leave is around $5k…not sure what it would be for five years. Hopefully you can make it swing though. Maybe they will let you do a payment plan?

  28. I have a good pension plan at work, but I also contribute to my retirement savings. With a pension, we only have about 16% put away toward our retirement (10% from employer, 6% from employee) which is not a bad sum, but not adequate if you want to retire early.

  29. When I was in university and earning not a whole heck of a lot I saved up my RRSP room. Now that I earn a decent salary I get to fill up that unused room. I have never been so excited for tax time!

  30. Gail, what would you consider to be a low income and low tax rate? I have struggled to put money into an RSP even though I have no debt and am frugal. By the time I retire, I will not have much in the RSP. If I fit into the low income and tax rate category, I will have to change my approach.

  31. I’m now 30 years old and have been putting a monthly amount into my RRSP for the last 2 years. I’ve also started a TFSA but am wondering if I should take the risk with a high interest TFSA? I want to make my retirement as comfortable as possible and have a goal in mind of where I’d like to retire. But am nervous about a high interest account because I’m worried about losing that cushion?

    Very new to the financial planning game.

  32. I am a fairly high income earner and my employer has a retirement program where they contribute 5% of my gross salary to a defined contribution pension plan, and/or an GRSP. I can choose the split between the two. It could be 5% to the DCPP and 0% to the GRSP, vice versa, or anywhere in between. They also have a savings plan where they contribute 5% of my salary to the GRSP, SPP (share purchase plan), NREG (non-registered savings plan) and or a TFSA (tax-free savings account). I also have a personal RRSP. I am 34 years old.

    I am very lucky to have such a generous employer but I have no idea how to decide what to do! Any advice that anyone can give me would be very appreciated.

  33. […] Who Should NOT Have an RRSP? Gail Vaz-Oxlade goes on an interesting angle suggesting that there are folks who really shouldn’t be thinking about RRSPs (surprisingly I am one of them), Gail has been a good sport all year, as I have poked her more than once on line. […]

  34. My RRSP contribution limit is really low every year because I have a defined-benefit pension. I’ve still tried to contribute to my limit. After reading this, I’m wondering if that’s even wise!

  35. here’s my experience with RRSPs. I was 21 and I needed a car loan. My bank advised me that because I had little credit, and had only been working for about 6 months that they wanted me to shiw them I could save first, before they would loan me anything. They told me to open an RRSP and deposit $200 every month for six months and come back and re-apply for a loan. Six months later I did come back to the bank, my $1200 RRSP statement in hand. They obliged with my first loan. I borrowed $8500 (at the ridiculous mid 1990’s rate of 14.25%). I made my regular loan payments on time every month but the continuing RRSP payments of $200 became a burden. I decided to close the RRSP account and use the money to pay down my loan. The bank advised me that it would take 2 weeks to withdraw my money because the money was in a GIC and a T-Bill. They also advised me that the account was “back-end loaded” and that I was required to pay a $75 fee. This on top of the fact that the government considered the money as income, reduced my original $1200 RRSP to $957.50. I made no interest on the wimpy GIC and no return on the T-Bill. My advice is for young people to stay away from RRSP. They are a trap.

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