The registered retirement savings plan marketing blitz has begun. The short-term reward is a tax refund in the spring, but there are at least three situations when it’s probably better to take a pass.
It’s a reminder from the finance industry that the deadline to deduct a contribution against last year’s taxable income is March 1.
Marginal tax rates rise as an individual’s income grows. Canadians who made less than $45,000 last year, for example, normally pay less than 20 per cent. The rate grows as income grows; sometimes over 50 per cent on the top tier amount. Young Canadians might want to take a pass and save their RRSP space for their higher-income years. Contributions to a tax-free savings account might be a better idea because - while the contribution is not tax deductible - withdrawals are not taxed.
In comparison, if you invest in an RRSP, the best comparable guaranteed return from a guaranteed investment certificate is close to five per cent. And there’s no escape. Ottawa will eventually impose minimum withdrawal amounts when they force you to convert your RRSP to a registered retirement income fund the year after you turn 71.
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