RRSP - why is it worth it?

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asked Dec 15, 2018 07:36 PM by
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Hello, I am thinking about opening an RRSP, but it seems like a risky investment to me. There is the TFSA, but let's say I maxed out my TFSA contribution. Even at that point, it seems an RRSP may not be worth it compared to a regular non-registered account, yet the RRSP is so popular and the more I think about it I don't understand why. Let me explain.

From my understanding, the advantage of an RRSP is that I can deduct the amount I contributed from my income on my taxes, which means I will get a big refund, especially if I am in a higher tax bracket. The disadvantage is that if I withdraw money before my retirement, I face penalties in that one, the amount I withdraw will be added to my income for that year on my tax form, making me pay more taxes at a higher bracket, and two, I will pay withholding taxes on that amount of up to 30%.

So if I think I may make a major withdraw before my retirement, does that mean an RRSP isn't worth it? This could be for a number of reasons but let's say I want to buy a house. You may say there's the Home Buyers Plan. For me personally, there is a good chance I will buy a home (or retire) outside of Canada, so I wouldn't be able to use it (and it may also cost me more to withdraw due to tax complications with withholding taxes, etc.). But even if I bought a home in Canada, the Home Buyers Plan only covers $25K which is small compared to the cost of a home.

If most people will buy a house, then I would think they would try to pay as big of a down payment as possible. Then that means most people will have at least one point before their retirement in which they will liquidate pretty much their entire savings for a purchase. Then how come it is also true that it seems most people have an RRSP?

Is it because the tax savings from contributing to an RRSP will more than compensate for withholding taxes and other penalties when they withdraw? If it is, how can someone calculate whether or not an RRSP will be worth it given their personal situation?


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answered Dec 24, 2018 11:35 AM by
Jin Won Choi gravatar image Administrator

Hi saskriders,

An RRSP is definitely worth it for someone who wants to withdraw money during retirement. If you withdraw money when your income is very low, then you end up taking deductions from your income when your tax rates are high, and adding them back when your tax rates are low. You can also save on capital gains taxes while your money resides inside your RRSP.

That said, you raise some very good points about the use of RRSPs for the purposes of making down payments. I would actually not use an RRSP (beyond the $25k allowed under the Home Buyer's Plan) for anything that requires withdrawing money while your tax rates are high. Instead, it would make sense to withdraw money from TFSA or build savings in fully taxable accounts.

Hope that helps,


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answered Dec 18, 2018 08:32 AM by
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Hmm interesting questions. I think in your case, you would be wise to either chat with an advisor, or to model out a number of scenarios (with differing marginal tax rates, RRSP balances, etc.) to see what will work out best for you. I think a lot will depend on what your marginal tax rate is when you contribute compared to what it is when you withdraw.

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