When Should You Avoid Your RRSP’s

Chances are you probably have an RRSP because you were told it’s good to have one to reduce taxes and also a great way to save for retirement. Generally speaking, RRSP’s are a great vehicle to use, but it’s not appropriate for everyone, and depending on your unique situation, you may be better off not using the RRSP.

Let’s take a look at when you shouldn’t use your RRSP’s

You Have High-Interest Debt: If you have a carry-forward balance on your high-interest credit card from one month to another that you just can’t seem to get rid of, you should not be investing in your RRSP’s. Instead, all of your cash should be re-directed to eliminate this debt.

Your income will be much higher in the future: If you are expecting to earn more money in the future than you do currently, it would benefit you to save your RRSP room to be used in the future when your tax bracket is higher, which will give you a larger tax refund.

Your current income is low: Every Canadian gets a “basic personal” amount of $11,327. Which means if you earn less than this in any given year, you don’t have taxes to pay, which defeats the purpose of contributing to the RRSP

If you are in a higher income tax bracket at retirement: In theory, the best scenario for an RRSP is when your income in retirement is lower than it is now because of the tax deferral benefit an RRSP gives. If you have a great pension plan with work, and you are a great saver, it is possible your income at retirement will be higher than it is now, and the RRSP will hurt you financially because the taxes you pay when you withdraw the money would have been greater than the tax reduction you got now, eliminating the tax deferral advantage.

You will need this money before retirement: If this money is not set aside for retirement or to buy a home, then the RRSP will not be a suitable vehicle to use and you are better off with a TFSA, where it offers the flexibility to withdraw money any time without tax consequences.

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