December 3, 2019

Three reasons why RRSPs still matter — and one of them you probably didn’t

For years, an RRSP was the only tax-assisted retirement savings plan. New plans, such as a TFSA, now appear more attractive, especially to younger employees. However, there are still some advantages of RRSPs. First, they are more effective for those in a higher tax bracket. And, RRSPs may also be better for young people based on their “effective” tax rate, which factors in clawbacks of government freebies like the Canada Child Benefit (CCB). Second, RRSPs are better when holding foreign dividends or interest, because TFSAs aren’t recognized as tax-sheltered accounts by foreign nations, so they’re charged a 15 per cent withholding tax. Third, RRSPs can also help for higher education through the $20,000 for the Lifelong Learning Plan, or save for a down payment for a first home with the Home Buyer’s Plan (up to $25,000 for individuals and $50,000 for couples). If you can afford it, then most experts advise having both accounts.

Key Takeaways:

  • Now that there are other, good options like the Tax-free Savings Accounts (TFSAs), RRSP’s are starting to lose some of their luster.
  • RRSPs provide a tax deduction, which is often accompanied by a tax refund in the spring. TFSAs don’t, although they will shine in retirement because their withdrawals won’t be taxed, which means they won’t trigger OAS (or even GIS) clawbacks.
  • For higher-income Canadians, the RRSP is better than a TFSA for retirement savings, as there is a clear advantage of receiving the deduction at a higher marginal tax rate, and paying tax in retirement at a lower marginal tax rate.

“With a looming March 1 deadline for RRSP contributions to defray income taxes for calendar 2018, not to mention the tax-filing crunch looming on April 30, some pundits question whether the RRSP’s time in the sun has passed.”

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