Different Choices Maximize the RRSP Net Benefit

Abstract

Canada’ Registered Retirement Savings Plan (RRSP) is a tax-deferred account intended to help workers save for retirement. 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 on after-tax savings 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.

Twenty-one examples of common advice are re-evaluated. Different choices result from the different understanding of the RRSP’s net benefits.

Keywords: RRSP, Canada, Benefits, Retirement, Tax Deferred, Tax Shelter

JEL Classification: D14, J26, H24, H31, G51