RRSPs — A Prudent Approach

Now that Registered Retirement Savings Plan (RRSP) season is officially upon us, you can’t watch television, listen to the radio or flip through a magazine without seeing or hearing advertisements for retirement savings products. While it’s certainly a good thing the industry is encouraging Canadians to save for retirement, the downside of this mass marketing blitz is many people believe that as long as they put loads of money into their RRSP they’re set.

While this might be the case for a segment of the population, it certainly doesn’t apply to everyone. Before you set up an RRSP or continue making regular contributions to one, you need to sit down and take a realistic look at how it fits into your overall financial picture.

Get the big picture

Think of your RRSP like a pension plan of sorts. As such, it should be a secure investment vehicle and you should be realistic about how much it will provide—there’s no room for “get-rich-quick” schemes here.

As well, if you already have an employer-sponsored pension plan, you don’t have to count on all your retirement income coming from an RRSP. It might make more sense to put that money into a more flexible investment vehicle, such as a GIC, stock or bond, where you can move money in and out with relative ease.

The subtleties of tax savings

Tax savings from RRSPs—contributions are tax deductible and investments grow within an RRSP tax-free—make them very appealing. These are great perks, but many people don’t understand that even though they save money when they contribute to an RRSP, they have to pay it back when they take the money out.

For example, under the Home Buyers' Plan, which allows you to use up to $20,000 of your RRSP to apply to the purchase of your first home, you are required to pay the withdrawals back into your RRSP over a maximum of 15 years. Failure to do so will result in 1/15th of the RRSP initially withdrawn having to be added back to taxable income in any year the minimum re-deposit is not made.

Finally, RRSPs need to be managed, and it takes both time and knowledge to do so effectively. Unfortunately, not all professional financial planners have your best interests at heart when they recommend a particular retirement savings product. This means you have to spend some time either learning about various products and terminology so you can do the job on your own, or find someone who you can trust to do it for you—a person who isn’t motivated entirely by product commissions.

The moral of the story is there are no blanket statements for retirement planning. You should never say RRSPs are great or RRSPs are terrible. Instead, take a hard look at your individual situation and go from there, because what’s good for one person isn’t good for everyone.