The article “Who Should Bother with an RRSP? Part 2” was originally published on Financial Pipeline by Malcolm Morrison.

Registered Retirement Savings Plans are the best tax break available for the average Canadian for one simple reason – they give the saver the opportunity to deduct contributions from taxable income and the money you make from your investments won’t be taxed.

Not immediately, anyway – you will have to pay tax on your withdrawals. Nancy Grouni, a certified financial planner with Objective Financial Partners in Richmond Hill, Ont., says RSPs aren’t for everybody . She says it sometimes makes more sense for some people to utilize their Tax Free Sheltered Account (TFSA).

Malcolm: I’m really thinking that maybe some people should be looking at really utilizing their TFSAs instead of their RSPs?

Grouni: You’re right. I think especially also if someone’s in a low tax bracket so again to give you an example: if you’re making $40,000 a year right now in Ontario, your tax rate would be about 40% it would be about – excuse me 20%, so quite low. Based on 18% of earned income that would mean you could put $7,200 into your RRSP which is great then the tax refund corresponding tax refund would be over fourteen hundred dollars. You remember in our previous scenario we talked about a tax refund for the top income earner of over $13,000 so that’s quite a differential. But then some would say “hey, a refund is a refund and as long as you use it wisely then it can make sense for you” and that’s true but again we have to look at the projected tax rate during retirement. So if you’re in a low tax rate now, then chances are you’ll be in a lower tax rate in retirement. If you’re earning under $20,000 during retirement then it could be that you’re subjected to the GIS (Guaranteed Income Supplement) claw back which all of a sudden skyrockets your tax rate to potentially over 65% at that time – very punitive.

Malcolm: I think what you’re suggesting here also that, again, while RSPs are great for a good chunk of people, I think what we’re perhaps seeing is that very high income earners, very low income earners at the extreme ends, that RSPs really aren’t great vehicles for these people.

Grouni: That’s true it’s something that has to be taken into consideration in the context of an entire financial situation. What are all the other moving parts? What are the projected tax rates? It could be for a high income earner many Canadians honestly are able to do both they’re able to contribute fully to the RRSP and then contribute to their TFSA and benefit from both of those vehicles over the years but it doesn’t always make sense for everyone especially if they’re in a high tax bracket during retirement. It could they could be subjected to hidden taxes like the OAS (Old Age Supplement) claw back.