While an RRSP contribution probably makes sense for most people, there are some situations where other alternatives make more sense:
Carrying debt: Debt is typically very expensive especially when being financed at double-digit interest rates.
Even an unsecured loan from a financial institution will typically charge interest in the mid single digits for clients with a good credit history.
There is simply no investment available that will provide a similar guaranteed after-tax rate of return as simply paying down debt.
Sometimes the best investment you can make is saving a dollar in interest.
Already in the lowest tax bracket: Since withdrawals from a RRSP are counted when calculating income-tested benefits such as the Old Age Security (OAS) and Guaranteed Income Supplement (GIS), provided by the government for low-income seniors, Canadians already in lower the lowest tax bracket might be better off avoiding RRSPs.
To make your RRSP contributions worthwhile you should, at a minimum, make contributions in a tax bracket, in your working years, at least 10 per cent higher than the one you’ll be in at retirement
Higher tax bracket in retirement: If retirement income is going to push you into a higher tax bracket, tax deferral is the only benefit provided by a RRSP.
Other options such as paying down debt or investing in a Tax Free Savings Account (TFSA) might be more attractive.
Please remember to always consult your investment advisor before taking any action.
Stuart Kirk is a Wealth Advisor with Precision Wealth Management Ltd and an Investment Funds Advisor with Manulife Securities Investment Services Inc. The opinions expressed are those of the author and may not necessarily reflect those of Precision Wealth Management Ltd or Manulife Securities Investment Services Inc. For comments or questions Stuart can be reached at stuart@precisionwealth.ca or call 250-954-0247. Website: www.precisionwealth.ca.