Pattie Lovett-Reid

Chief Financial Commentator, CTV

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Are RRSPs still relevant? They absolutely are still relevant especially if you are a salaried individual in the top tax bracket of 53.53 per cent.

The ability to defer tax today when you are in a higher tax bracket until down the road in retirement when you presumably are in a lower tax bracket  makes all kinds of financial sense. 

I'll give you an example - if you are making more than $97,000 today and can defer getting taxed at 43.41 per cent and draw the funds out of your RRSP at 20.05-29.95 per cent at the time you retire, you will have had the benefit of tax a deferral on your funds prior to retirement, and will ultimately pay less when you take the money out. Think of it as a long term tax elimination strategy. 

Now, are RRSPs for everyone? No.

If you are a low-income earner who will have accumulated less than $100,000 in your RRSP at the time of your retirement, it might make more sense to save in a TFSA instead. Lower income earners qualify for a government program - the Guaranteed Income Supplement. When you withdraw from your RRSP it is considered to be taxable income and that, in turn, could disqualify you from receiving the GIS. I like the idea of trying to save a little something and would consider using the TFSA as withdrawals are not considered to be taxable income and won't compromise your ability to qualify for government programs.

Students in lower tax brackets, for example, would be better off with their savings in a TFSA. There would be little tax saving today. Especially if their income is below $13,229 as there is no federal tax owing. A student with years ahead of them before retirement is more likely to value the liquidity and flexibility offered by a TFSA. Also, a TFSA withdrawal is not considered to be taxable income and the contribution limit resets on Jan. 1 of each year. An RRSP withdrawal adds to taxable income and you can never get that contribution room back. Once you contribute to an RRSP and then take the money out the contribution room is gone forever.

What is the most overlooked element of an RRSP? 

The Home Buyers Plan has given first-time home buyers a little extra they may have needed to purchase amid the scorching housing markets of recent years. The ability to borrow up to $35,000 per person from their RRSP towards the purchase of a home with repayment back into the RRSP over 15 years has provided some with the extra funding they needed to qualify for a mortgage. But it isn't free money and it must be paid back into the RRSP. The extent to which you miss a repayment in any given year is factored into your taxable income for that year. 

Jordan Damiani, Senior Wealth Advisor at Meridan Credit Union suggests you should use your RRSP tax refund to help "super-charge" your down-payment towards a home. Re-contributing the refund to the RRSP can help you get towards the $35,000 threshold just that much faster, Damiani said. 

As well Damiani reminds us that you can qualify as a "first-time home buyer" even if you have bought a home in the past, as long as you haven't owned a home within the CRA's qualifying period starting Jan. 1 within the four years preceding the first-time home buyer's withdrawal.​