For most people, RRSPs are pretty hard to beat however they are a few instances that quickly come to mind when RRSPs are not the way to go.
- When you need the money in the short term, you should avoid contributing to an RRSP. Not only you will owe the tax refund back, but you will also lose your deduction limit. Some tax advisers would recommend a short-term RRSP when your tax rate is high and will drop in the following year to benefit from the tax difference but again, I do not advocate this because eroding your contribution room is quite costly. The tax free compounding is very valuable over the long-term.
- When your income is going to be higher at retirement. This is very rare but if you anticipate your income to be higher at retirement than it is today, you should avoid making an RRSP contribution. Avoid a situation where you obviously have to pay more tax later than the tax saving today.
- When you are close to the GIS qualification. If your savings are modest and you anticipate having very low income at retirement, it would be best to avoid RRSPs which could jeopardize qualifying for the Guaranteed Income Supplement.
- When you expect a very large RRSP at 71. If you calculate that your RRSP will be so big at age 71 that the minimum annual payment might clawback your Old Age Security (OAS) benefit it would be best to stop contributing to your RRSP.
If you meet one of these situations, you may be best to contribute to a TFSA or make a non-registered investment.
Careful calculations and projections must be made to plan properly. Make sure to discuss these few points with us at your next annual review meeting.