What you need to know before investing in an RRSP

The RRSP deadline is fast approaching. In fact, there is no RRSP “season”, you can contribute to your RRSPs throughout the year, and the deadline for contributions to help you reduce your prior year’s tax bill is at midnight on March 1st. But before you run off to put some money into your RRSPs, let me tell you a few things.

Why invest in an RRSP in the first place?

First, I would like to remind you that a registered retirement savings plan, commonly known as an RRSP, is nothing more than a type of account. You can open an RRSP account with a discount broker, a robo-advisor, a bank, and even directly with labour-sponsored funds such as the Fonds de solidarité FTQ. This is an important distinction because it means that you can use an RRSP account to invest yourself.

You can deduct the amount you invest in an RRSP account (up to 18% of your income for the past year or $26,010 (validate amount for 2020)) from your annual taxable income. In other words, you contribute to your RRSP to pay less tax. So if you’re a student or have a low income, putting money into an RRSP account is not very beneficial.

RRSP account limits

The problem with RRSP accounts is that you need to pay tax on any money you withdraw from them. And because the money you invest will grow in the account, you may pay even more tax in the future.

In fact, there’s a reason that the word “retirement” appears in this account’s name. This is because it was designed for people who want to save for retirement. So if you have stop working when you take your money out of your RRSP account, you will end up paying less money to the government.

Like everything related to taxation, there are some exceptions. You can use the bacon invested in your RRSP to buy a first home (HBP) or go back to school (LLP), but you still have to repay the money you withdrew back to your RRSP afterwards.

Most people anticipate that their income will increase throughout their life, so the only good reason (if you ignore the two exceptions above) for these people to invest in an RRSP account is to save for retirement.

On the other hand, if you plan to earn less money for one or more years in the future (even if those years precede your retirement), because you want to travel around the world, start a business, or fulfill your dream of becoming a shepherd in Australia, an RRSP could be of interest to you.

One final thought about RRSPs

Do you like what you do? How would you like to continue doing what you’re doing after the age of 72? If you answered yes to the last question, an RRSP could potentially cost you more in taxes. In fact, you will be forced to start taking your bacon out of your RRSPs at age 72.

Assuming that you’ll make more at that age than you do today, it’s very possible that you’ll be taxed more on the money then than you would have been if you had decided not to contribute today. And considering that life expectancy keeps increasing, and work is done increasingly more in front of a computer, what makes you think you’ll want to retire at 72 years of age? Click on this article to know how to use a spousal RRSP.