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Contributing to a personal RRSP can be a good tool to use to save taxes and grow wealth... but it isn't always.
The yearly tax break that you receive when you contribute to a personal RRSP is a huge draw for most people. The problem is – as I mentioned last week when discussing the Spousal RRSP – you don’t actually get a tax break. It’s just a tax postponement. You have to pay that tax when you withdraw money from your RRSP. And depending on your life and financial situation, you could end up paying more in taxes.
So when is contributing to a personal RRSP good?
Contributing to an RRSP will be an advantage for you if you are in a lower tax bracket in retirement than when you contributed to it.
What must happen for you to be in a lower tax bracket?
#1: You need to receive less taxable income, or
#2: Tax rates must decrease.
Back in 2018 most Canadian tax experts agreed that Canadian tax rates would almost certainly increase over the next couple decades, Since then, Canada’s federal debt has increased dramatically to $1,170,300,000,000.00. That’s over 1 Trillion Dollars! And it’s increasing by $424,109,589.00 daily. DAILY.
With that in mind, I think we can confidently say #2 isn’t going to happen.
That means your left with one option to make the RRSP the right tool for you - #1: You need to receive less taxable income.
Here are 4 questions to ask yourself prior to contributing to an RRSP. If all your answers are YES, the RRSP is likely a good choice for you. If not, let's have a discussion and find the right tax-saving tool for you and your family.
- Do I currently live, and spend well below my annual income?
- Am I confident I will not need (or want) the same (or more) income in retirement than I am earning now?
- Do I expect my annual income to stay the same, or decrease between now and retirement?
- Based on my knowledge of Canada’s increasing debt, am I confident tax rates will not increase?
Is a personal RRSP right for you?
Did you find this exercise helpful? Email me and let me know.
Is this Spousal RRSP right for you? Find out here.
If you’d like to help setting up an RRSP (if it is right for you), or an alternative to it (if it’s not right for you), I’d love to help.
Written by Brendan Peters, of Fresh Ground Financial.