Different Choices Maximize the RRSP Net Benefit
23 Pages Posted: 22 Sep 2018 Last revised: 29 Jan 2019
Date Written: September 1, 2018
Canada’ Registered Retirement Savings Plan (RRSP) is a tax-deferred account intended to help workers save for retirement. It has existed for so many decades that professionals feel certain they know everything there is to know about the account. Its rules and mechanics are well known not only by professionals but also by the public.
This paper presents an analysis of the RRSP net benefit that contradicts the received wisdom. A math proof and conceptual model shows the RRSP net benefit is the sum of five independent factors.
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. A bonus (or penalty) is created by withdrawals taxed at rates lower (or higher) than at contribution. Both are possibilities.
3. Benefits from income-tested programs are lost in retirement (and gained when young).
4. There is a growing penalty from delay in taking the contribution’s tax deduction.
5. The Home Buyer’s Plan benefit is the profit earned on withdrawal taxes not paid, until the loan is repaid.
In contrast, the commonly believed benefits and conceptual model are shown to be contradictory and fail to explain outcomes.
A. The contribution’s tax reduction is not a benefit, ever, for anyone.
B. There is no benefit ‘from deferral’.
C. Profits are not taxed on withdrawal.
D. A bonus from lower effective tax rates on withdrawal may be less common than a penalty from higher rates.
E. The Home Buyer's Plan may do more harm than good.
Examples of common advice and choices are re-evaluated using the factual RRSP costs and benefits. Different choices result from the different understanding of the net benefits to be maximized.
Keywords: RRSP, Canada, Benefits, Retirement, Tax Deferred, Tax Shelter
JEL Classification: D14, J26, H24, H31
Suggested Citation: Suggested Citation