Money & Career

4 reasons not to use an RRSP

Author: Canadian Living

Money & Career

4 reasons not to use an RRSP

As the RRSP deadline approaches, countless articles and news reports will explain why you should invest in one of these accounts. But RRSPs aren’t necessarily the best place to put your retirement savings. In fact, there are some very good reasons not to put all your money in an RRSP. Here are four of them.

1. It's hard to withdraw from RRSPs
Technically, you can take out any money you put into an RRSP at any time, but then you’ll have to pay tax on that dough.

The idea is that you put money into the account when you’re young and in a high tax bracket and remove the cash when you’re retired and paying less income tax. If you pull the money out while you’re still working, you could face a significant tax hit. It’s because of this tax threat that people rarely touch the money that goes into an RRSP.

2. You don’t get the dividend tax credit
Canadian dividends are taxed at much lower rate than income -- around 16 per cent, depending on your tax bracket.

A lot of investors keep their dividend-paying stocks in a non-registered account so they can get that favourable tax treatment. You’ll get the full dividend payout if you keep these yielding businesses inside a registered account -- which you can then use to buy more stock -- but, again, when you remove money from the RRSP it’s taxed as income. So essentially (and eventually) you’ll be paying a higher tax rate on those dividends.

3. You don’t make enough money
Many experts are now saying that if you make less than $75,000 -- though for sure less than $40,000 -- you’ll be better off using a tax-free savings account.

If you make below these amounts, the tax break you get for contributing may not be worth it -- especially if you’re a diligent saver and those investments do so well that you end up in a higher tax bracket in retirement than when you were working.

4. You want the capital gains tax advantage

When you sell an investment that makes money, you have to pay capital gains tax on two-thirds of half of the profit. In other words, if your investment makes $1,000, you pay about 66 per cent tax on $500 -- half -- of the gain.

When you withdraw money from an RRSP, you pay tax on the entire amount. In many cases, you’ll end up paying more tax on that $1,000 if it’s held in an RRSP. Some people like holding their hot stocks outside of an RRSP so they can realize those gains and pay less tax. You may be wondering, why use an RRSP at all? Well, the tax refund you’ll receive, which you don’t get with non-registered investments, will grow your portfolio faster and better than the capital gains tax break -- assuming you reinvest the refund in your RRSP.

RRSPs still make sense for most Canadians, but don’t blindly put all your hard-earned cash in one. Talk to an adviser to see if the RRSP makes sense for all your investments.

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4 reasons not to use an RRSP

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