It’s RRSP season until March 1.
RRSP’s sometimes get a lot of bad press. But they are still a great choice in some cases and Spousal RRSPs can be a fantastic choice in some cases.
But back to the bad press…
Those now withdrawing RRSP funds in retirement face heavy marginal tax rates and some of them lament that they would have been better off in a taxable account where only growth (interest, dividends and realised capital gains) is taxed – and much of that is taxed at lower rates – but actual withdrawals are not taxed.
But these complainers tend to forget a number of things including: 1. They generally got a big tax refund upon contributing to the RRSP. Each $1000 contributed may have cost a net $650 after the tax refund in which case you can argue that 35% of “your” RRSP was funded by the tax refund. 2. In a taxable account there would have been annual tax to pay all those years. 3. Without the incentive of that tax refund an awful lot of people would never have saved much for retirement at all. The end result is that most people with large RRSP withdrawal tax bills would simply never have had anywhere near as much saved without the RRSP. And in any case, this is the “deal” we all sort of signed up for when we made RRSP contributions, so why complain now?
These days the TFSA is indeed a better choice in a lot of situations. But some lucky people can maximise the TFSA as well as contribute to an RRSP and that still makes sense if they are in a relatively high tax bracket.
For those (probably increasingly rare) cases of a single earner couple, the spousal RRSP can be a fantastic way to go and is really something of a gift. A high income earner can get a large tax deduction and if the spouse has very little other income in retirement they may be able to withdraw those RRSP funds (which will have grown tax-free) at a very low tax rate. If the high income spouse gets a 35% tax refund and the low / zero income spouse later withdraws at a very low tax rate, the end result is actually a negative tax rate!
In the archived newsletters I have written about RRSPs in the past and compared them to TFSAs. Do a search for “RRSP” or TFSA in the newsletter list here if interested.