REGISTERED RETIREMENT SAVINGS PLAN (RRSP)

    Retirement planning has become the major focus for many Canadians as we have an aging population. With so many options for Canadians let’s try and make sense of registered retirement savings plans or RRSPs for short.

    The Canadian government launched RRSP account in the year 1957 with a motive of preparing Canadians for life after retirement. Every year you contribute to RRPs you would receive a tax deduction. For every year your investment grows your tax is deferred (again no tax year to year), it’s only upon withdrawing from your RRSPs you are taxed at your personal tax rate. In 1957 most Canadians would pay more tax during their working years than in retirement, so this plan made sense and Canadians did get a good tax vehicle for retirement. The average retirement age back then was 65 with an average life expectancy of just over 72.

    Fast forward to where we are today and many Canadians retire at 65 however now the life expectancy is over 87. Not only is their money expected to go further but most Canadians retire into the same tax bracket they had in their working years. It’s because of this that RRSPs get a bad representation. So let’s look at when RRSPs make sense and what alternatives are out there.

    If you think about the structure of RRSPs, it becomes clear for at least one reason to invest in RRSPs is tax.

    • Tax deduction each year you invest
    • Tax-deferred growth
    • Taxed as income upon withdrawal

    Looking at this we know if your personal taxes are higher in your working years than in retirement, RRSPs work in your favor. They become advantageous to you.

    This is still true for some Canadians. If you have paid off your debts, mortgages, car loans or unnecessary expense your need for income could be less in retirement.

    What If Your Taxes are Higher in Retirement?

    Tax-free Savings Accounts (TFSAs) can help you in handling such situations. TFSAs are the inverse of RRSPs.

    • You contribute after-tax dollars into your TFSA
    • Your money grows tax-free
    • Withdrawals are tax-free.

    Therefore, TFSA works well when you put money away in lower tax brackets than when you withdraw.

    We will go more into TFSA later but for now back to RRSPs.

    There are some additional considerations when withdrawing your RRSPs. First off, you must convert your RRSP to a registered retirement income fund (or RRIF) by the end of your 71st birthday. Again, if you remember, people didn’t live as long back in the 50s and 60s so this didn’t seem unreasonable. What’s worse is the government requires you to withdraw a certain percentage every year. Depending on how you invested your RRSP and how much you contributed over the years this can end up either dwindling your account down or placing you in another tax bracket.

    It’s for this reason you will want to carefully plan your retirement. For more information or any help planning your retirement feel free to contact us.