RRSPs not for everyone

RRSP contributions don’t make sense for everybody. People with credit card debt should always pay that off first. And giving priority to car loans and mortgages generally makes sense, although many financial advisors believe risk-tolerant persons can end up further ahead run with a mortgage and an RRSP invested in the stock market.

Even if someone has no debt, RRSP contributions may not make sense if they are in the lower income tax brackets (less than $35,000 in Ontario). If their RRSP gets too big, they may end up taxed at a higher rate in retirement.

Or they may end up losing government benefits. Every dollar in annual retirement income above $14,500 (approx.) claws backs $0.50 of the Guaranteed Income Supplement (GIS); every dollar above $62,000 (approximately) claws back $0.15 of Old Age Security (OAS) benefits (until they are gone at just over $100,000 in income). Also impacted are a multitude of means-tested benefits like drug prescriptions, etc.

Low income isn’t always a reason to pass on RRSP contributions. A person may want to use an RRSP to save for a down payment on a house under the Home Buyers Plan. Or they plan to retire early or take time off work (and live frugally). Also, if one expects to be in a higher tax bracket down the road they can contribute to an RRSP (to get the tax-free compounding) but not claim the tax deduction until the years their income is higher. 

Original post by Larry MacDonald

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