An RRSP is not a Retirement Plan

RRSP RefundThere is a pre-conceived idea that a RRSP account is your retirement plan. That all your hard earned savings should go towards it. The financial institutions surely advertise it that way. For many, it may be the only retirement account they will have but for anyone wanting to take control of their finances and retirement, you will need to look at it as an account with tax free advantages amongst all your other accounts.

In a previous post, I have discussed the most popular accounts that are used for investing and you will noticed that the Tax Free Savings Account (TFSA) come at the top of my list. The main reason is that it is completely tax free. There are no fees or taxes to be paid for withdrawing from it and you pay no taxes on the money you make inside of it. Imagine if you are 20 now, by the time you are 30, you’ll be able to put $50,000 dollars and make it grow tax free. Depending on when your retirement target is, you may have contribution room for nearly $200,000. When you consider the TFSA account, a retirement plan is not based on a RRSP account anymore.

Even before the TFSA account was introduced, a RRSP account should not be looked at as a retirement plan. I take the time to educate co-workers and friends when this idea is mentioned. Not that investing in a RRSP is discourage, but rather that a RRSP alone is not a retirement plan. A retirement plan should include all your accounts and take into consideration the tax implications of your investment at the time you plan on retiring. More specifically, an investor needs to understand the following tax implications within all of their accounts:

It should also take into consideration your company retirement plan if you have one. The public sector has a very good retirement plan for their employees, provided you are happy to work for 30 years. These investors may never need to use their RRSP since it is part of the retirement plan depending on how it is setup.

Most of all, YOU need to define how you want your retirement to be. WHERE do you see yourself. SET GOALS towards a retirement plan. Are you going to retire on a shoe string budget? Or are you going to manage dozen of properties? YOUR AMBITIONS will guide your planning and goals.

Some thoughts to challenge investing in a RRSP account:

  • If you plan on buying a few stocks and retain them for 20 years, what are the tax savings the RRSP account provide you with?
  • If you buy dividend paying stock, do you save in the end when you withdraw the money? You definitely leverage tax free growth on tax efficient dividends, but how much taxes will you pay on it when it comes time to withdraw it.

Consider all your accounts for your retirement plan and not just your RRSP account. Each type of account has a purpose and can work together. I may not seem interested in a RRSP account from this post, but most of my wealth is in my RRSP account at the moment because it is beneficial as my company has a matching contribution plan. However, I have nearly $100,000 in unused contribution room and filling that gap is not a goal of mine at the moment. Having contribution room can actually be useful at some point…

7 Responses to "An RRSP is not a Retirement Plan"

  1. I was recently informed by an accountant that I should start using my RRSP savings for my daily living expenses and save all the money I earn in my professional corp.
    This idea is foreign to me having grown up with -“RRSP is your retirement nest egg”
    Is the accountant correct or am I being misledagain???

    1. @VB
      It’s all about taxes. RRSP is a tax deferred account and not a retirement plan. Your retirement plan is all your assets.
      Sit with your accountant and ask him/her to run you through the numbers. All your money in all your accounts represent your retirement nest egg, what you need to do is figure out how to make the best use of it. You might be able to pay yourself a dividend out of the company and it beats many other tax rates which is why he is looking at that option.

      When you have money, it’s all about managing taxes 🙂 Congrats on getting to where you are.

  2. I hold the bulk of my dividend growth portfolio in my RRSP and will be converting it to a RRIF later this year and then begin withdrawals next year. I know I won’t be taxed efficiently but I still feel a DGI strategy is my best option for longevity of the portfolio with inflation protection provided through dividend growth. My plan is to keep my yield in the 4% to 5% range and not withdraw more than 1% of funds per quarter or 4% per annum. The extra will be reinvested. This should ensure I never run out of money. In all likelihood the portfolio size will increase over the long term.

  3. @Bernie: Our plan was the same, but I wish we had discovered DGI much earlier, then our dividends would certainly have grown much faster than the withdrawal rate. We transfer the max to tfsa’s, take a withdrawal to cover taxes and the rest gets transferred to our non-reg account.

    DGI: good article!

    1. Here is one situation when RRSP is clearly beneficial.
      I came to Canada in my thirties, 20 years ago and am right now in high tax bracket. I contribute to RRSP
      and get nice refunds but I am aware that whatever I save will not be enough to support current life style.
      That’s fine and I am ready to accept it. One thing that will make it a bit better is the fact that I will be taxed a lot less
      when I start withdrawing money from my RRSP. It is as if RRSP was designed exactly for people like me.
      At this moment, investing in non-registered account while there is unused RRSP room is counterintuitive to me.
      If I have extra cash leftover after contributing to RRSP and TFSA, then yes, I will start buying dividend stocks in non-registered account.

      1. @PP Thanks for your comments. You are doing the right thing. What the post is trying to do is educate readers that a Retirement Plan is not the RRSP itself but how you manage everything together by understanding the tax benefit of a RRSP, TFSA and other investment vehicles. Together, all of the accounts and the decisions you make in retirement are your RETIREMENT PLAN.

        Looks like you are thinking it through very well and ensuring you do what works for you and the RRSP account is your primary account for retirement.

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