5 Reasons to Skip the RRSP Contribution this Year

The conventional view serves to protect us from the painful job of thinking.

~J.K. Galbraith

January is already coming to a close and February will soon be upon us. In the Canadian financial realm, that usually means a mad dash by financial advisors and journalists to remind us that we only have a few weeks left to make the obligatory contribution to our RRSP, or face the reality of dining on Tender Vittles in our golden years. This year, however, there seems to be a bit of an RRSP backlash, with more than one article taking a not-so-fast tone to contrast the steady “RRSP now” drumbeat pounded out by some members of the financial services industry and media.

Recently, Jon Chevreau of the Financial Post reviewed a report by CIBC Wealth’s vice president of tax and estate planning, Jamie Golombek. The report said that some Canadians may be too quick to jump into the RRSP instead of a TFSA (Tax Free Savings Account) because of the up-front tax refund. Many forget that we still need to pay taxes on that RRSP money when we withdraw it, and that it will be included in our income at the time. That can result in clawbacks to government benefits like GIS (Guaranteed Income Supplement) or and OAS (Old Age Security).

So maxing out your RRSP contribution may not always be the best course of action. To be sure, it’s a great idea if you happened to have a very high income in the past year, or if you received some kind of one-time bonus or windfall. But it’s not always the optimal choice, especially since the introduction of the TFSA.

The Most Important RRSP Question

For me, the number one question to ask yourself before you put money into an RRSP is the following:

What is the likelihood that you will pay less tax on that money when you withdraw it than you would now?

If it’s likely your tax rate will be lower when you take the money out, then by all means, contribute some cash. But if you’re pretty certain your tax rate might be about the same or higher, then it makes more sense to invest that money outside an RRSP.

5 Reasons to Skip the RRSP Contribution this Year

There are several reasons why you might want to temporarily exit the RRSP highway this year:

1.  You’re in Debt

  • If you have credit card debt, it’s probably costing you about 20% a year in interest. You’re better off paying off that debt first.
  • If you’ve taken on a little more house than you can afford, you might be concerned that a rise in interest rates might make your mortgage unaffordable. Why not pay down the mortgage instead of contributing to you RRSP? It provides a guaranteed, tax-free return at your mortgage rate.
  • If you have a car loan, consider the interest you’re paying. Would it make more sense to pay off the car?
  • If you had higher income last year and you really want to take advantage of the tax refund an RRSP contribution will provide, go ahead and make the contribution, but make sure you apply the refund to your debt. 😉

2.  You’re Young

  • If you’re in your 20’s or even your 30’s or 40’s, there’s no way of knowing what the tax laws will look like when the time comes to withdraw money from your RRSP. What if the tax rates are even higher then?
  • Rules surrounding RRSPs and retirement could change by the time you retire.
  • You probably have a lower income if you’re just getting started. In that case, it makes more sense to max out your TFSA contribution room and pay down debt first.

3.  Lower Income

  • Perhaps you’re income wasn’t that high last year. In that case, it’s better to save your contributions for a time when your income is higher.
  • If you’re concerned about losing your job or you’re in sales or self-employed and you had a slow year, you may want to put your savings for the year outside an RRSP in order to have better access to the money in case you need it. (If you needed to withdraw the money from an RRSP, you would have to pay tax on that money.)

4.  You Have TFSA Contribution Room Available

  • If you have some TFSA contribution room left, you may want to max that out first and then put the remainder in an RRSP, depending on some of the other factors mentioned here.
  • Money earned in a TFSA is completely tax free when you withdraw it, and it has no effect on income-tested government programs like GIS and OAS.

5.  You Already Have a Lot of Money in Your RRSP

  • Obviously, you shouldn’t contribute more than the amount allowed by your RRSP contribution limit.
  • If you have a good chunk of change in your RRSP and you’ll also be receiving a substantial pension in retirement, it’s probably a good idea to take a look at the tax implications. If your tax bill is going to be very heavy in retirement, it might be time to lighten up on the RRSP contributions and consider some non-registered investments or savings products.

If you’d like another take on this, Jim Yih recently wrote a great article on The New Debate Between RRSPs vs. TFSAs.

Are you contributing to your RRSP this year, or taking a break to focus on other priorities?


  1. Jaymus (RealizedReturns)

    Great list. This “voice of reason” seems to be getting more and more popular all of the time. It seems as though everywhere I turn there’s more people that have wised up to the RRSP situation. Years of marketing by the banks seem to have the population convinced that there is one and only one way to plan for retirement and it is though RRSP contributions.

    • 2 Cents

      Very true. RRSPs are just one tool for retirement savings. You have to understand them to really make them work for your individual situation. Thanks for your comments Jaymus!

  2. Sustainable PF

    Great reasons! On the TFSA advice, i’d add that if you have a pension via your employer it may be more beneficial to contribute to your TFSA as you will have a defined income when you retire and the RRSPs will be taxed more harshly.

    • 2 Cents

      Absolutely. You need to understand your total income picture in retirement. Thanks for pointing that out! 🙂

  3. Jim Yih

    Thanks for the mention Kim. One thing I teach young people is the importance of a forced, committed long term savings. I still think that the RRSP creates more commitment because it is too easy to access the TFSA. One of the secrets to financial success is DISCIPLINE which seems to be lacking in many people’s finances. The TFSA is great for people with discipline but sometimes the consequence of withdrawal in the RRSP is not a bad thing.

    • 2 Cents

      Discipline is a must for sure. I see what you mean regarding the penalties for taking money out of RRSPs, but I still think we need to be careful about relying too heavily on RRSPs without understanding that you will be fully taxed on that money when you take it out. A big picture view can help people decide how much RRSP money is best for them.

      Thanks for weighing in Jim, & congratulations on your new site! (

      • Jim Yih

        You are correct. A big picture view or a plan is essential! Paying tax on the RRSPs in retirement is not a bad thing especially if you get a bigger tax deduction than the tax you pay when it comes out.

        Thanks for the kind wishes and your continued support of my endeavors!


        • 2 Cents

          Agreed. ~And you’re welcome! 🙂

  4. Echo

    I contributed to my RRSP for 10 years and took advantage of employer matching opportunities. Since I’ve changed careers and have a defined benefit pension, my first savings priority was to maximize my TFSA each year. I still have loads of contribution room in my RRSP, but it’s just not a priority for me any longer.

    I was actually interviewed by the Globe and Mail about this subject (the article will come out tomorrow in the Life section). Since we will be building a house and taking on a bigger mortgage this year, we will be forgoing RRSP and TFSA contributions this year in order to pay down our mortgage more quickly in the early stages. Of course if I magically end up with an extra $5k, I will contribute to my TFSA as well.

    • 2 Cents

      It sounds like your situation is a good example of a time when skipping the RRSP contribution is a good idea. You already have a good start on retirement savings, and you plan on paying down your mortgage near the beginning of it, when it counts the most toward interest savings. Your point about managing your tax burden in retirement in light of your pension plan backs up what Sustainable PF was saying earlier.

      I’ll look for the article tomorrow! 🙂

  5. Jessica07

    RRSPs are like anything else with investing. You have to truly assess where you are, where you want to be, how long you have to get there, and then try minimizing the risks. You make a great case for postponing contributions.

    • 2 Cents

      For sure. There’s no one size that fits all. Thanks for your comment!

  6. Kathy

    We’re a single income family. We max out the TFSA’s, hubby does his pension thru work (he contributes, company matches), we do a small spousal RRSP, and then do tax paid (non sheltered?) investing. We are striving to be in my father’s situation come retirement (we hope, we may not get there) — he complains about the RRSP’s he invested in, as he ended up in a higher tax bracket after retirement….his advise, spread your money around, not all in one basket.

    • 2 Cents

      Sounds like you’ve got all of your bases covered really well. Congratulations on setting so much aside for your future! 🙂

  7. My Own Advisor

    Fair post. I would argue if you’re in a low tax bracket, avoid the RRSP all together. This is a tax deferral tool. If you don’t need to defer the tax (i.e., not high income) then don’t use the tool. Tax avoidance tool (TFSA) is much more valuable for most.

    • 2 Cents

      I have to agree. If you’re in a low tax bracket, there’s no great benefit to using RRSPs. And if you think you’re going to be in the same bracket, or even a lower one in retirement, the income you draw down from your RRSP or RRIF may cause your OAS or GIS to be clawed back. The same is not true for TFSA withdrawals.

      Thanks for stopping by! 🙂

  8. Henri DeToi

    But if you are in the higher tax bracket, I have made the calculations below to demonstrate that you are better off maximizing your RRSP than pay the tax upfront and invest in a regular account. Of course, this new TFSA vehicle is the best way to go first.

    The tax rate utilized is constant at 41.7%, the 2010 tax rate. Evidently, it was higher in the past and it is probable that it will go up in the future. The higher the tax rate and the rate of return on your investment, the more advantageous it is to invest in an RRSP. I have used a 10% rate of return per year with my example and the difference is 19,000$ clear in your pocket. When you factor in that the government has reimbursed you a total of 75, 941$ that you have reinvested, it seems like a no brainer to me. It is true that you will have to repay 128,000$, but you will have made money with the government’s 75,941$ that you will have reimbursed him without interest. Furthermore, I have calculated the taxation rate without an RRSP at half the rate for capital gains. Often, when we invest we are paid dividends and sometimes, as in the case of unit trust; we are taxed at the full rate as income. My calculations are conservative and give the benefit of every doubt to the method of investing without an RRSP.

    The RRSP method wins in a convincing way. I hope my figures stay aligned; otherwise they won’t make sense.

    Year /Max cont. / Return,/ Reimb./ After reimb.| Without RRSP/Tax paid/ Net
    2002 $13,500 14,850 5,500 8,000 | 8,800 – 167 = 8.633
    2003 $14,500 32,285 6,046 8,454 | 18,795 – 356 = 18,440
    2004 $15,500 52,564 6,453 9,047 | 30,235 – 573 = 29,662
    2005 $16,500 75,970 6,880 9,620 | 43,210 – 819 = 42,391
    2006 $18,000 103,367 7,506 10,484 | 58,163 – 1,102 = 57,061
    2007 $19,000 134,604 7,923 11,077 | 74,952 – 1,421 = 73,531
    2008 $20,000 170,064 8,340 11,660 | 93,710 – 1,776 = 91,934
    2009 $21,000 211,270 8,757 12,243 | 114,595- 2,172. = 112,423
    2010 $22,000 256,597 9,174 12,826 | 137,774 – 2,611 = 135,163
    2011 $22,450 306,952 9,362 13,088 | 163,076 – 3,091 = 159,985
    Total tax reimbursed 75,941

    Rate of return : 10%
    Taxation rate : 41.7%
    Taxation rate (gains en capital): ½ of 41.7%
    Net profit with RÉER: (306,952- 128000) : 178,952$
    Net profit without RÉER : 159,952$

    Difference : 19,000.00$

  9. JC

    If you’re marginal tax rate is lower in retirement, the RRSP is better than a TFSA. The opposite also holds true- higher tax rate at retirement (unlikely)? go the TFSA route first.

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