For this month, I am going to detour from my “Path to Business Ownership – An Accountant’s Viewpoint” article series and explore a timely subject I get asked about regularly this time of year – RRSPs. The most common registered retirement savings plan (RRSP) question I receive from clients is simply whether an RRSP contribution is a good idea for them. Unfortunately, there is no simple answer, as there are several factors to consider before deciding whether to make an RRSP contribution.
The most obvious advantages to an RRSP include: the tax deduction generated, the accumulation of investment income tax-free, and the ability to withdraw funds tax-free under the home buyers’ plan and the lifelong learning plan (although these withdrawals do need to be repaid, otherwise they become taxable). Overall, use of RRSP investing allows an individual to maximize their investment due to the tax-free growth and up front tax deductions, compared to individuals who make the same investments outside of an RRSP plan.
Before we delve any further into this, it is important to clarify the tax implications around RRSPs. An RRSP contribution is really only a tax deferral, as the funds are fully taxable once withdrawn from the plan. This means you are able to claim a deduction in the year you make a contribution, however, you will be taxed on any future withdrawals from the plan. So before any final determination is made on whether a contribution makes sense, consider the following:
Often during the early years of your work career, your taxable income is quite low and RRSP contributions may not be your best investment. Tax deductions during your lower income earning years really don’t save you that much in taxes, and down the road, you will likely be in a higher tax bracket when you begin withdrawing funds. In periods of low taxable income you might want to consider using your Tax-Free Savings Account (TFSA) as a means of retirement planning.
It is important to consider your best tax option, and talk to your accountant or advisor about what makes sense for your particular situation.
Jonathon (Tug) McGraw, BCOMM, CPA, CA
BDO Canada LLP
Jonathan can be reached at: firstname.lastname@example.org