The article “These Are The Situations When Contributing To An RRSP Isn’t Worth It” was originally published on MoneySense on May 22, 2018.

Julia has a DB pension and is maxing out her TFSA. Is an RRSP worth it for her?

Q: I’m a teacher of 11 years, and I’m wondering about where to invest money after my TFSA is topped up. What I love about the TFSA is that I can have a high performing portfolio and, years down the road, I can cash in without worrying about being taxed or having to temper the amount I would like to withdraw. (This is also why I’m hesitant to take on RRSPs given the healthy pension upon retirement).

What is your recommendation for next steps? Should I invest in a non-registered account? Or give in to the RRSP option? My goal is to harness the magic of compounding, so I can be successful in later years.


A: There seems to be a lot of anti-RRSP rhetoric going around these days. Ever since Tax-Free Savings Account (TFSAs) came along, some people are skeptical about paying tax when they take money out of their Registered Retirement Savings Plans in the future.

So, to avoid paying tax in the future, those people instead pay tax today.

Given your TFSA is maxed out and it sounds like you expect to max it out every year, Julia, you can either contribute to your RRSP or you can open a non-registered investment account. The RRSP gives you tax deductions, tax-deferred growth and better compounding than the non-registered option. Non-registered investing gives you no tax deduction, taxable growth on interest, dividends and realized capital gains, and eventual capital gains tax payable on deferred capital gains.

Capital gains may only be 50% taxable, compared to 100% taxable RRSP withdrawals, but how important is that tax deduction up-front?

When I run the numbers, Julia, if someone expects to be in a similar or lower tax bracket in retirement, it is generally advantageous to contribute to an RRSP over a non-registered account. Most people are in higher tax brackets during their working years and a lower tax bracket during their retirement years, but it depends on your situation.

With a defined benefit (DB) pension, say you work 30 years and have a 2% pension formula, replacing 60% of your final average earnings. Canada Pension Plan (CPP) will generally replace less than 25% of your income unless you have a low income or work until 65. Old Age Security (OAS) won’t likely get you up to 100% income replacement between the three pensions. And unless your spouse also has a generous pension, you may ultimately split part of your retirement income with your spouse, all but ensuring you a lower income in retirement than during your working years.

The point is that not a lot of people have higher incomes in retirement, Julia. Someone working part-time or at a low income may be in a higher tax bracket in retirement. And these may be the people who should consider avoiding RRSP contributions because the tax savings today may not be worth the higher tax rate in retirement. TFSAs are likely better savings vehicles for them than RRSPs, and non-registered investing may also beat out RRSP investing as well.

Low income seniors may also be entitled to government benefits like Guaranteed Income Supplement (GIS). RRSP contributions for a worker with low projected retirement income may limit entitlement to such benefits.

TFSAs and non-registered investing therefore play important roles for savers who have a choice. But for someone with a high income during their working years, a retirement income likely to be lower, and TFSAs that are maxed out, what little RRSP room you have available should probably be utilized. And if you can’t max out your RRSP and your TFSA, your RRSP may be a better option.

You haven’t mentioned debt, Julia, but debt repayment might be the only thing that causes me to reconsider whether RRSP contributions are worth considering for you. I’ve worked with clients over the years who are projected to have generous retirement incomes, but cash flow during their working years is tight and they can’t pay off their mortgage by retirement. There’s no point in being pay cheque to pay cheque during your working years just to be flush with cash flow and saving money each month in retirement.

So, if that’s the case, foregoing RRSP or TFSA contributions may not be a terrible idea. Saving too much money at the expense of living a bit today is better than not saving enough for retirement, but both scenarios have their drawbacks.

In summary, Julia, I think RRSP contributions could be beneficial for you. There are plenty of other factors to consider, but based on what you’ve told me, I think I’d opt for RRSP contributions over building a non-registered portfolio. You’ll pay less tax today and you’ll likely pay less tax over the balance of your life, which is the most important consideration.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.