Are RRSPs worth it in Canada?

Short Answer

Principally, a Registered Retirement Savings Plan (RRSP) is a tax effective tool to grow your retirement funds at a compounding rate. However, its worthiness for a specific person depends on various aspects. Continue reading to find what they are.

Detailed Answer

RRSP or Registered Retirement Savings Plan Canada

Retirement Planning and savings is key to financial security and peace of mind during old age. RRSP in Canada is a Registered investment plan that solely aims at accumulating money for one’s retirement. Let’s find out if contributing to RRSP is worth it.

Are RRSPs worth it in Canada?

Let's understand if RRSP is beneficial with the help of few scenarios:

Use case 1

If you are currently earning $120,000 and if you are looking to reduce your tax liability, the RRSP is worth it. In this case, you can contribute up to $21,600. This can in turn be claimed as a deduction from your earned income which will save taxes up to $5,616 (26% MTR).

Use Case 2

Similarly, imagine you have retired (same person as above) and your retirement income is $40,000 per annum of which you withdraw $10,000 per annum from RRSP. Then your marginal tax rate is 15% per annum. Your withdrawal tax will be $1,500 per annum.

For a like for like comparison, your contribution of $10,000 during accumulation phase saves you $2,600, where, for the same $10,000 withdrawal you pay tax of 1,500 during retirement. Overall, you save $1,100 for every $10,000.

Use case 3

Image, if you are earning $50,000 now and if you are estimating that you will receive $100,000 earnings during the retirement phase. Then, RRSP is not the right tool for you.

Use case 4

Imagine you are currently 25 years old and a new entrant to the employment workforce and you look to retire by age 70. Then your funds in RRSP will stay for 45 years which will reap both tax advantages and compounding effects in growth. In this case, RRSP will be effective for you.

Use case 5

If you are 60 years old and if retirement planning has suddenly struck you, you can still invest and grow money, but the tax advantages of RRSP depends on your current and estimated marginal tax rate.

Is RRSP Canada worth it?

Generally, RRSP is a tax-advantageous vehicle. However, to find out if it is worth it for a particular person, we have to take into account various factors such as the person’s age, current income, current marginal tax rate, retirement income required, expected marginal tax rate in retirement, goals and preferences.

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Categories: RRSP
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