What they don’t tell you about Registered Retirement Saving Plans (RRSPs)


RRSPs are one of the most commonly used types of investment strategies, but are really not that well explained or understood. Most people are aware that one of the main benefits of putting money into your RRSP is that you can use these contributions as a deduction to reduce your taxable income. For example, if I make $100k in a year and I contribute $20k to RRSPs, my taxable income for that year is reduced to $80k ($100k – $20k), which will greatly reduce my tax owing for the year. 

While this is a great short-term benefit and can lead to a nice refund when you file your taxes, it is important to realize that an RRSP is a tax-deferred account. In other words, although you would not be taxed on the $20k you contributed, you will have to pay tax on this money when you withdraw it from your RRSPs. This part of the equation isn’t as widely advertised and explained by the companies trying to sell you on putting all your money into RRSPs, which results in many people ending up with a ton of money tied up in RRSPs that they can’t withdraw without losing half of it to tax. 

So the question is why wouldn’t these companies be more up-front about the downside to this investment option? Well, the answer is simple: because they are making a very high management fee (usually about 2.5%) on all of the money you have sitting in RRSPs. This is another one of the downsides that investors should be wary of. As such, most advice is very biased and, too many times, not in your best interests. 

Now I don’t mean to put an entirely negative spin on RRSPs, there are certainly situations where RRSPs can be very useful. Mainly, RRSPs are effective when you are in a high tax bracket (i.e. you have high taxable income) and you anticipate being in a lower tax bracket in later years. Going back to our example, if I make $100k in a year then putting $20k in RRSPs would make sense if I anticipate making less than $50k in the years I want to withdraw my RRSP funds. That way, I get a 30-40% tax saving going into the RRSP, and I’ll only pay 20% coming out of the RRSP (I’m up at least 10% on tax savings alone).  

However, if I know my income is going to stay the same or increase, then I am just going to have to pay the tax I am saving that year when I withdraw that $20k, which can often be very inconvenient. This makes no sense, and that is why I am sceptical about RRSPs, very sceptical. In addition, if someone is already in the lowest tax bracket (taxable income below $50k) then any contributions they make to RRSPs will result in paying the same (or in many cases more) tax when this money needs to be withdrawn. Again, this makes no sense at all. 

Overall, RRSPs can be a solid investment option in certain situations, but they are certainly not the one-size-fits-all investment answer that they are often promoted as. 

An alternative to an RRSP is a Tax-Free Savings Account (TFSA), with the difference being you do not receive a tax deduction on contributions to a TFSA but you also don’t pay tax on withdrawals. Also, remember that any investment you choose to hold inside of an RRSP can instead be held outside of the RRSP, either in a TFSA or not inside of a TFSA.  (just delete your highlighted area)

In closing, do not think of an RRSP as an investment, it is simply a vehicle to hold an investment, as is a TFSA. (just delete this too)

I hope you found this article helpful. If you have any questions regarding RRSPs and TFSAs then get in touch with us and we will be happy to offer any advice you may need.

– Gerry

Edit: On The Run Agency