The article “Who Should Bother With An RRSP?” 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 the main sticking point when deciding whether or not an RRSP is a good idea is your tax rate.

Malcolm: You know I think that people have an idea that RSPs are the best tax break the average Canadian can get and that’s certainly true for an awful lot of people. But I am not quite sure that really applies to everybody.

Grouni: You’re right, Malcolm, it really isn’t a one size fits all type of solution. And I’ll tell you, the short answer is, it depends. What does it depend on? It depends on your tax rate. So what is your tax rate both during your working years on the one hand and on the other hand, what is your projected tax rate in the future? So just to get a little more specific, for example, if you’re a top income earner in Ontario right now (2016) and you’re making over $220,000 a year, that puts you at the top marginal tax bracket, actually at 53.5 per cent. Based on a maximum annual RSP contribution limit in 2016 of over $25,000, that would mean you could look forward to a refund of over $13,000. Certainly compelling to see why an RSP strategy would make sense in that scenario.

Malcolm: Absolutely

Grouni: But there’s more to this equation. So what happens over time? Well your RSP picks up momentum as it grows. It’s growing on a tax-deferred basis. It’s all good but at some point down the line, the government says that “no later than the year that you turn 71 you have to begin withdrawing from this vehicle”. So then the question becomes, what is your tax rate at that time? The lower that the answer is, that the lower the tax rate that you’re in, the better it is for you, the less tax that you’re paying on your withdrawals because every dollar of income you withdraw from your RRSP is fully taxable at your marginal rate.

Malcolm: Of course and it’s all based on the assumption that you’re not going to be making as much money in retirement, so when you withdraw this – that’s why it’s supposed to work and be at a lower tax rate but it doesn’t always work out that way.

Grouni: That’s right, so I’m glad you brought that up because in theory it makes a lot of sense. You’re right, that is the way it works out for most Canadians, they’re in the lower (tax bracket) they can look forward to at least a typical middle-class retirement and so the RSP saving strategy can work. However in reality, in practice, it may be very difficult to determine decades from now what your projected tax rate will be.