Every once and a while, someone will say that they don’t believe in RRSPs.
Folks, we are not talking about Santa Clause or the Tooth Fairy here. Whether you believe is not the question.
Now, if would be a different conversation if these people were saying “I don’t think that RRSPs are the optimal solution for my particular situation.” That statement could certainly be true.
But that’s not the way that the “I don’t believe in RRSPs” conversation unfolds. Generally speaking, the people who are inclined to say they don’t believe in RRSPs are usually of the misguided opinion that RRSPs are a losing proposition.
Folks, there is no ambiguity about this. Used correctly, the Registered Retirement Savings Plan is one of the best, time-tested, widely available, proven tax planning and wealth creation techniques available to the average Canadian. If not the very best option.
Never mind the “what about…” scenarios. Used properly, RRSPs work great.
If you are wondering whether the people who say they don’t believe in RRSPs may have a point, let me ask you a question…
Do you believe in math? Do you believe in making rational, evidence- based decisions?
Because the math is convincing.
If you live in British Columbia and earn $140,000, you are facing a combined marginal tax rate of roughly 38 percent. If you contribute $20,000 to an RRSP, you will get a tax refund of about $7,600. Already, the math is working.
But possibly even more impactful than the up-front tax deduction is the tax-sheltered growth. Inside an RRSP, you will not pay any tax on the interest, dividends, or capital gains that you make on your investment. If your $20,000 RRSP earns 6 percent annually for 30 years, that single contribution will grow to roughly $114,870.
This tax-sheltered growth is the part that people often don’t fully appreciate. If you compound your money in a tax-free environment for a few decades you are going to end up with substantially more money than if your money had been exposed to taxes along the way.
Critics will say “Yeah, but RRSPs are taxed at withdrawal!”
So what? Most everyone is in a higher tax bracket when they are working then they will be after they stop. This means the RRSP gives you the chance to save money while you are in a high tax bracket, not pay any tax at all while you are growing your wealth, and when you do have the money taxed it’s in a lower tax bracket. And, on top of all that, you can even split income with your spouse, reducing your taxes even further.
When someone says they do not believe in RRSPs there is a good chance that they had a bad experience once. Maybe they had terrible investments. Maybe they took money out at the wrong time. Maybe they were never shown how to use RRSPs properly. None of these things are the fault of the Registered Retirement Savings Plan.
I am not saying that RRSPs are a perfect fit for every scenario. If you are in a very low tax bracket now then you are probably going to look at the TFSA, or even the FHSA, before the RRSP. If you are a high-net-worth person with access to advanced strategies, then there may be other choices. You may go in a different direction if your focus on estate planning rather than retirement income. This is why planning matters.
But rejecting RRSPs outright is not a strategy. It is a misunderstanding.
The RRSP deadline for 2025 is March 2, 2026. It is not too late to save on your 2025 tax return.
Unless you don’t believe in tax refunds either.
Brad Brain. CFP, R.F.P., CIM, TEP is a Certified Financial Planner in Fort St John, BC. This material is prepared for general circulation and may not reflect your individual financial circumstances. Brad can be reached at www.bradbrainfinancial.com.
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