Alison's Money Rule

Should you contribute to an RRSP?

Posted January 20, 2012
Originally Published January 10, 2012

There are sometimes better ways to save for retirement than through RRSPs

This is the time of year when you tell yourself to save more and contribute more to my RRSP.  Yes to the first one but the second, perhaps not.

Certainly Canadians need to save more than the current rate of 4 percent of income.  However, the default destination for those savings, an RRSP, isn’t necessarily the right one. 

Anyone who is likely to qualify for the Guaranteed Income Supplement (GIS) after age 65 is better off with a non-registered investment account or a Tax Free Savings Account (TFSA).   Mandatory RRIF withdrawals could result in a reduced or eliminated GIS. 

GIS eligibility is reduced as net income rises and disappears entirely at about $16,000 for singles and $21,500 for couples (OAS does not count as income.)

At the other end of the scale, those likely to have significant incomes after retirement from a combination of pensions, non-registered investments and other income could face not only a high post-retirement tax rate, but claw back of OAS and a reduction in their personal exemption.

The latter is not well known and can be a considerable shock.  Though OAS claw back doesn’t kick in until a net income of around $68,000, the age amount tax credit for those 65 and over will be reduced once net income reaches roughly $33,000.

TFSAs are great alternatives for those wanting to save outside an RRSP.  However,  you can only deposit $5,000 annually.  Another alternative are non-registered investment accounts though you will pay tax on income or capital gains.

A final “savings” alternative is to pay down debt.  Even though your interest costs may be low every dollar you put on debt is a form of savings.

I hope Toronto readers will join me at the Toronto Reference Library on January 25^th at 6:30 p.m. for a discussion about how to take control of your finances, especially your investments. 

And last week I included details of a contest to win a one-on-one consultation with me.  Unfortunately the link was not live.  But it is now at my website, www.alisongriffiths.ca.

Sidebar

96% of tax filers were eligible to contribute to RRSPs in 2010

26% of tax filers contributed to RRSPs in 2010

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