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Dale Jackson

Personal Finance Columnist, Payback Time


Canadians who made their registered retirement savings plan contributions before the March 1 deadline can probably look forward to a tax refund this spring. In many cases, it’s the sole reason they contribute, but tax season also brings an opportunity to look at the big picture and see where all those contributions are going.

As odd as it may seem, there’s a real risk you could be contributing too much. Many senior Canadians regret packing their RRSPs through the years as they face higher tax brackets when they withdraw their money and, in some cases, forced minimum withdrawals that result in Old Age Security clawbacks.

It’s not easy to see the tax train coming straight at you in retirement because it’s often impossible to know how much your investments will grow inside an RRSP.

As examples, assume two people contribute $10,000 a year to their RRSPs starting at age 30. The first person generates a five per cent annual return, which results in savings of $950,000 by age 65. The second person generates a seven per cent annual return in their RRSP, which results in savings of $1,480,000 by age 65.

The first person is much more likely to be able to withdraw their RRSP savings in a low tax bracket before the account is drained. The second person has much more money locked behind the tax wall and will need to withdraw some of it in a higher tax bracket. Canada Pension Plan and Old Age Security payments are also behind that tax wall – potentially putting the second person into an even higher tax bracket.

You may know of a retiree lamenting the amount of money they socked away in their RRSPs, but there’s one advantage younger generations have that were not available to them: a tax-free savings account. Canadians now have the advantage of diverting some of their retirement savings from an RRSP to a TFSA, where withdrawals are never taxed.

It’s not easy to strike that balance between RRSP and TFSA, but a qualified investment advisor can certainly make it easier.