Mikestrathdee’s Blog

Do RRSPs make sense for you?
January 21, 2011, 10:00 pm
Filed under: Investing

published in the January 2010 issue of Christian Week Ontario

Do RRSPs make sense for you?

With another New Year, the annual ad blitz reminding people to make their RRSP contributions is getting in full swing.  By one report, the number of RRSP plans opened in 2008-2009 decreased by more than 100,000 from the previous year.

Most Canadians aren’t saving enough (if anything) for retirement.  A drop in RSP contributions also isn’t hard to understand, given the economic downturn. At the same time, it may be the case that for some of these people, not contributing to an RSP was a wise choice, particularly in the following circumstances:

  • You have credit card debt. If you are carrying a balance on your credit card, there is no legal investment you can make that leaves you further ahead than paying off credit card debt.
  • You need to choose between RRSP and RESP contributions .  While there are no tax deductions for RESP contributions, the federal grant that comes alongside money you put into this plan makes it a superior choice, particularly for people who don’t owe much tax and have average household income. People with family incomes of $77,000 or less get a 30 per cent government grant for the first $500 they put in an RESP. A 20 per cent grant is available on the first $2,500 in annual contributions, regardless of income level. In the unlikely event a child ends up not pursuing post-secondary education, you can roll your contributions into your RRSP, provided you have contribution room.
  • Mortgage debt.  Paying down your mortgage might be a better choice depending on the interest rate of your mortgage, how comfortable you are with debt, and the guaranteed rate you can get on another investment.  In his book “Enough Bull – How to Retire Well Without The Stock Market, Mutual Funds, Or Even An Investment Advisor,” accountant David Trahair argues that if forced to choose, “there are many more reasons why I’d rather have the house than an RRSP.” Trahair is strongly opposed to investing in stocks or mutual funds, but his argument makes strong sense for risk-averse investors at least.
  • Low income bracket.   For people in the lowest income bracket, the tax benefit of putting money into an RRSP isn’t that great. When the RRSP is drawn down, receiving that income could also affect the amount of government benefits the person receives. Using a Tax-Free Savings Account (TFSA) instead could make more sense.
  • Saving for down payment on a home. Even as flexible as the federal RRSP Home Buyers’ Plan is, it is not for everyone. Some people are better off using a TFSA to save for their down payment, David Trahair argues. People whose mortgage and related payments strain their household cash flow may find it difficult to come up with the required money to replenish their RSP, he says.

On the other hand, an RRSP top-up may be your best move. Make sure you consider all your options before writing the cheque to add to your RRSP.


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