Rethinking the RRSP's Benefits

Abstract

Canada’ Registered Retirement Savings Plan (RRSP) is a tax-deferred account intended to help workers save for retirement. Its rules and mechanics are well known, but not its benefits. This paper presents an analysis of the RRSP’s net benefit that contradicts the received wisdom. It provides the math proof and conceptual model to show the RRSP's net benefit comes from five separate and independent factors that add together.

1. Profits are never taxed. Not while in the account and not on withdrawal. This benefit always exactly equals the same benefit from a TFSA. It is the only factor everyone receives.
2. An x% bonus (or penalty) comes from withdrawal tax rates x% lower (or higher) than at contribution. Both are possibilities.
3. Benefits from other income-tested programs are lost in retirement (and gained when young).
4. There is a growing cost from any delay in collecting the contribution’s tax refund.
5. Additional profits are earned by the withdrawal tax not paid on Home Buyer’s Plan (HBP) borrowing.

In contrast, the commonly believed benefits and conceptual model fail to explain outcomes and have no math basis.

Keywords: RRSP, tax-deferred account, retirement, savings, Canada, benefits

JEL Classification: D14, J26, H24, H31, K34