How to Know if an RRSP Isn’t Right For You

March 1st is fast approaching: that’s the deadline to pay into your RRSP, reap the tax credit, lower your 2020 tax bill, and hopefully get a nice refund. It all sounds great; but a good financial strategy needs to include your current situation and any future tax issues. As you plan for retirement, here are three points to consider.

1. Take a Look at Your Debt Load
If you have credit card debt, you’re paying about 20% a year in interest. Consider tackling this and other cash drains before investing in an RRSP.

Ditto for a hefty mortgage. Interest rates are projected to rise shortly. Paying down your mortgage and reducing your carrying costs might be better for your budget.

2. If You’re Young or Have a Modest Income
At the start of your career, you’ll likely have a lower income than in the future. You can max out your Tax-Free Saving Account (TFSA), where all your withdrawals will be completely tax free. Or pay down costly debt. Save the RRSP tax deductions for when you fall into a higher tax bracket.

This is the same if your income is modest. Take a look at the TFSA instead.

3. Consider Your Retirement Tax Bill
With an RRSP, you postpone paying the tax until you take money out in retirement. The expectation is that your income will be more modest, you will be in a lower tax bracket, and you’ll pay less tax.

What if your income is expected to be the same? Or even higher than it is now? Ask your Financial Advisor for help projecting what you expect to live on.

Will you have a robust pension, an inheritance, or income from other investments? If you anticipate your tax rate to be just as high in retirement, then an RRSP may not work for you. Plan a financial strategy to leverage other investment and tax opportunities.

Also take into consideration that, with a high income in retirement, the money you are required to withdraw from your RRSP (starting at age 71) could result in a clawback of your Old Age Security and other government benefits.

Determine if an RRSP is right for you with good financial planning. Ask your Financial Advisor to show you how to save more tax and maximize your wealth.