It seems like it is fashionable these days to be anti-RRSP. And not just among investors — even some advisors (I’m told) are questioning the wisdom of investing in RRSPs.
Why? It is not hard to find reasons: they are taxed when withdrawn; they are often more heavily taxed upon death; tax rates have fallen in recent years; investment returns in recent years have been less than stellar; and there are new alternatives (such as the TFSA).
But while the message may have some populist appeal (especially among those looking for an excuse not to save), it is important to consider all of the facts when determining whether the RRSP is right for you.
To begin with: if you are a high income earner, it is a no brainer. Chances are you will be in a lower tax bracket in retirement — the result being a greater tax saving today than what it will cost you in the future. Combine that with tax-free growth and the result is usually straight-forward: a higher level of net-worth and potential income from your investments than would be the case were you to use other savings options.
But what if you won’t be in a lower tax bracket in retirement? What if your tax rate is the same?
It still makes sense, since you benefit from tax deferred growth as well as the fact that the money you would have paid in taxes is invested and earns a return.
However in this case the RRSP is rivaled by the TFSA. In fact if that is the case I would suggest starting with the TFSA. The problem there though is that TFSA contribution limits are capped at $5,000 per year — which for many is not enough.
Then there are all sorts of other issues: your mortgage, potential inheritances, your eligibility for government benefits during retirement, your cash flow … the list goes on.
The truth is: there is no rule of thumb or other simple answer to the question of whether you should be investing in RRSPs or anything else for that matter. It depends on your personal circumstances.
But there is one thing I can tell you from experience.
It has been my observation that retirees who have RRSPs (or RRIFs) are on average wealthier than those who do not. That is not to say that there might not have been a better way. Maybe there was, but it is not really that relevant.
The important thing is that you have a plan. Regardless of how you save, it is most important that you do save.
Please feel free to contact our office for more information.
Jim Grant, CFP (Certified Financial Planner) is a Financial Advisor with Raymond James Ltd (RJL). This article is for information only. Securities are offered through Raymond James Ltd., member Canadian Investor Protection Fund. Insurance and estate planning offered through Raymond James Financial Planning Ltd., not member Canadian Investor Protection Fund. For more information feel free to call Jim at (250) 594-1100, or email at jim.grant@raymondjames.ca. and/or visit www.jimgrant.ca.
