As a disclaimer, I am not an “investment guy” – I just like money and understand investing way more than the average person. I believe in specialization, which is why I typically refer those asking me to invest their money over to the experts at JustWealth.
I am tired of people coming to me saying that RRSPs are a rip off, without knowing how they work. In my opinion, RRSP’s are an important financial tool that helps one plan for retirement. You know how many times someone has told me that their RRSPs are not providing them with a good rate of return? When I ask them what they invested their money in, they replied “I told you, an RRSP”.
RRSPs Are Not The Investment!
It’s simply an account that lets you save for retirement on a tax-sheltered basis. Within the RRSP, you can have stocks, mutual funds, ETF’s, bonds, etc. The investments you choose to put into the RRSP is what dictates the return, not the RRSP itself. Think of the RRSP as your garage, and the investment as your car. Your “garage” doesn’t go 0 – 60 in 5.3 seconds, your car does. The 0 – 60 time is based on which car is parked in your garage. Similarly, the investment return is based on the investments that are being held in your RRSP. Remember, you invest INTO an RRSP, the RRSP is not an investment itself.
Don’t Forget, You Are Saving Tax Today with an RRSP!
Simply, if someone earned $110,000 today – they would pay approximately $28,595 in taxes. If that same person decided to deposit $10,000 into their RRSP, they would have reduced their taxes by $4,341.
While you do need to pay tax when you withdraw from your RRSP, the tax-savings today (which should be reinvested) is what can help you come out ahead. This is especially true if you are in a lower tax bracket at time of retirement. More on this later.
Don’t Spend Your Refund!
If you are comparing investing into your TFSA vs RRSP – don’t forget to take that tax-refund (which you wouldn’t get with a TFSA) and reinvest that refund back into your RRSP. Personally, I have been guilty of spending my tax refund on a nice vacation. Who doesn’t like taking a nice vacation?! That said, once I calculated the numbers on how much better off I will be in retirement by reinvesting the tax-refund – it was clear to me why that is a must.
Tax Rates Matter
When you are saving money, your refund is calculated at the marginal tax-rate. When you withdraw, it’s based on an average rate. So even if someone is earning the same income today as they are in retirement – the tax rate calculations will likely be different. I have an example of this below.
If someone is a relatively low-income earner, and they expect their income to significantly increase over time – than yes, it may make sense not to invest into an RRSP at this time. This will also save them contribution room down the road, allowing them to invest more into their RRSP at a time their marginal tax rate is higher.
Locking You Money In for Retirement
You need to think twice about withdrawing your retirement money from a RRSP due to the tax-implications. Given that you can withdraw money from a TFSA, at anytime without tax-implications, it is much easier to dip into your savings for “non-retirement” spending.
Now, if you are investing money today for something other than a retirement income (such as a boat or home renovation), a TFSA may be the perfect tool to help accomplish that goal.
Still Don’t Believe me? Here are the Numbers:
Canada Child Benefit
Another thing to consider if you have children. When you contribute into your RRSP you are essentially lowering your income. When it comes to the Canada Child Benefit, the lower your income, the more you will receive. For example, let’s look at someone who has two children – both under the Age of 6. By investing $5,000 into their RRSP vs TFSA, it would have provided them with around $500 more in Canada Child Benefit payments.
Here are a couple great supporting articles if you feel like reading more:
By Jeff Romansky
CHS, CPCA Principal, SecurePlan Insurance Solutions
Jeff started his insurance career in 2006 when he joined RBC Insurance. During this time, he helped hundreds of insurance advisors grow their business by providing them with comprehensive advice, consultation and training. His commitment to building strong relationships, paired with his positive attitude and specialized expertise led him to win multiple awards including being #1 in his position throughout Canada on numerous occasions.
After nine successful years at RBC Insurance, he decided to pursue his dream and start his firm to help professionals, executives and owner-managed businesses with their individual insurance and employee benefits. Jeff proudly serves clients throughout Southwestern Ontario and the GTA.
Jeff Romansky is a broker, so you can be confident that he is working for you and not the insurance company. He consultative approach is welcomed by his clients as they never feel pressured and are always correctly informed. When necessary, Jeff will work with or bring in trusted partners to meet your overall financial goals. He is committed to building long-term relationships with all his clients and viewed as a trusted partner to many.
Jeff’ resides in Grimsby with his wife and daughter. When Jeff isn’t hard at work, you can find him with friends on the golf course, curling rink or camping with his family.