When Should You Continue Contributing to Your RRSP?
If you have a group RRSP with matching contributions from your employer, this will provide a significant boost to your savings. Many group plans offer matching contributions of 25%, 50% or even 100% on contributions up to a certain dollar amount or percentage of income. To get this free money, you have to keep contributing. Defined contribution (DC) pension plans fall into the same category, with employer contributions making maximum participation an attractive option.
If you don’t have a lot of retirement savings or retirement income, RRSP contributions are also generally beneficial. The reason for this is that you will likely be in a lower tax bracket when you retire. Paying a lower tax rate in the future than today makes RRSP contributions even more attractive.
Anyone who is in a high tax bracket today – especially near or in the highest tax bracket in their province – will likely benefit from making RRSP contributions.
If someone plans to retire abroad in another country, late-career RRSP contributions are also generally advisable. The withholding tax rate on withdrawals from the RRSP and Registered Retirement Income Fund (RRIF) for non-residents typically ranges from 15% to 25%. Most countries have lower tax rates than Canada and will recognize tax withheld in Canada as a credit against foreign tax payable. Some countries do not tax foreign income at all, so withholding taxes on RRSP/RRIF withdrawals may be the only tax implications of withdrawals.
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When do you have to? not contribute to your RRSP?
Although most people are in a lower tax bracket after retirement, some may pay more taxes. An example might be someone who has a spouse with a large RRSP or pension, whose income is quite modest these days. Retirement income splitting allows most retirement income, including RRIF withdrawals after age 65, to be split up to 50% with a spouse. So a high-income retiree can transfer income to a low-income spouse’s tax return. A low-income taxpayer could end up in a much higher tax bracket after retirement in a case like this. It would make sense for them to divert their retirement savings into a tax-free savings account (TFSA) if you have the contribution room, or simply save in a non-registered account.
Someone retiring and working part-time may be another good example of someone whose tax rate may be higher in the future, and further RRSP contributions are not advisable.
Someone whose pension income is likely to be between €100,000 and €150,000 will also need to consider the impact of the Old Age Security (OAS) pension collection tax. OAS clawback acts as an effective 15% tax increase on RRSP/RRIF withdrawals for OAS recipients.
Government assistance such as the Guaranteed Income Supplement (GIS), a means-tested benefit payable to low-income OAS retirees, could be affected by RRSP/RRIF withdrawals. So if someone has a choice between RRSP contributions and contributions to a tax-free savings account (TFSA), and has little to no income beyond CPP and OAS, a TFSA may be a better choice than an RRSP.
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If someone has high-interest debt, especially credit card debt, this may be another reason to pause RRSP contributions.
Should Most People Contribute to RRSPs?
Most working-age Canadians can expect to be in a lower tax bracket in retirement than during their working years. As a result, most people should contribute to their RRSPs and will be better off in the long run by increasing their savings. If someone has maxed out their TFSA and has to choose between RRSP and unregistered savings, RRSP contributions can still be beneficial even if their tax rate in retirement is the same or slightly higher.
There is a non-financial benefit to segmenting savings into less accessible accounts like an RRSP. A TFSA or savings account is more likely to be raided for discretionary spending, so the psychology of RRSP contributions is a valuable consideration beyond the financial factors.
If you have an employer match on your retirement account contributions, you should almost always contribute regardless of your current or future tax rate.
Professional financial planners can help you predict your future income, taxes and investments using financial planning software. This can help determine whether RRSP contributions in the future will benefit your potential retirement expenses or your property value based on your actual numbers, rather than a rule of thumb.
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