RRSP's: Are they still a great investment vehicle?
RRSP's still make great sense. But with different investment options available, they are not always the best option. Here's a list of tips to consider when choosing the best way contribute to an RRSP, and the best ways to cash out!
When to contribute to an RRSP:
*When you need a tax break
*When you expect to pay a lower tax bracket later when starting to withdraw
*When you are saving to your retirement, and want tax-deferred growth
*When you are saving for a down payment on a home, you may be eligible to benefit from using the Home Buyer's plan. This allows you to benefit from the tax breaks when making RRSP contributions, and then withdraw up to $35,000 towards your down payment (tax free). You do have to pay yourself back!
*When you have the benefit of a matching contribution from your employer. This is a great benefit that many don't take advantage of! This great savings vehicle is a must-do in my books!
*One twist is that Spousal RRSP contributions can still apply to help with income splitting in retirement. This means the higher income earner contributes to an RRSP for the spouse. We use the high-income earners tax rate, and RRSP contribution room, but the withdrawals will be in the spouses name and at that tax rate (ideally lower).
When to Pass and consider other options:
*If you have cashflow, but virtually no taxable income, you must ensure that RRSP actually makes sense. If you will pay more tax when withdrawing the funds, is the tax deferral beneficial enough, or will it cost you. In this case, I would usually prefer to contribute to the TFSA. The tax-free benefit will often outweigh the initial tax-break of the RRSP.
* If you may need the funds in the shorter-term. Once contributed to the RRSP, you can withdraw them and pay tax. However, you are not able to use that RRSP room again. So, technically, you have lost the long-term tax deferral benefit once it's withdrawn. (Only a few exceptions apply, such as the Home Buyer's Plan and the Lifelong Learning Program)
* If you do have years where you have no income, then the RRSP can be used, or withdrawn and re-invested. In fact, in some cases, this makes sense. Once you start collecting CPP (Canada Pension Plan), OAS, (Old Age Security) and company pensions, then the RRSP (or RRIF withdrawals) are an extra that simply increase your tax rate.
Be wary of large loans for RRSP contributions. It used to be common for people to be encouraged to catch up. However, the interest is not tax deductible, and then you have an extra payment after the contribution is made. It often might weigh on your cashflow planning.
There are many more strategies to use the RRSP's and the RRIF's effectively. Need more information, then book your next appointment or send a quick email.
In the meantime ensure you make your contribution by March 2, 2020, to benefit from a tax reduction for 2019.
Contact us to learn more about RRSP Loans and Retirement Plans available to you.
If this all sounds familiar it is! This same feature appeared in 2019. I've added a few comments, but it's worth repeating.