Retirement » RRSP/RRIF

The improper use of RRSPs

The whole point of RRSPs is to encourage Canadians to save for their retirement. At a time when government benefits will be under pressure as the baby boomers head into their retirement years, Canadians will need to self-fund their own retirement.

Related article: How to save for retirement

Traditionally people with pensions fared well in retirement but that’s not always the case these days. Many defined benefit plans are being converted into defined contribution plans creating more retirement income uncertainty. Fewer workers are staying with the same company for 25 or 30 years. The employee is much more mobile these days which also leads to lower pension amounts. People are tending to start into the workforce a little later in life and most people want to retire sooner than later.

Related article: Pension plans are still the foundation of retirement planning

RRSPs are for retirement

One of ‘R’s in RRSP stands for Retirement. To give people incentives to save for retirement, the RRSP provides an attractive tax deduction at the time of contribution. You have to eventually pay the tax on withdrawal but if you can withdraw the money in a lower tax bracket than when you put it in, you will benefit beyond just the long term tax deferral of the RRSP.

Don’t withdraw money before retirement

In a CRA / StatsCan study, the average RRSP withdrawal is about $5000 and it has little to do with people in retirement taking out money for retirement. These withdrawals also have little to do with withdrawals to buy homes under the home buyer’s plan. Nor does the withdrawals have anything to do with the ability to withdraw to go to school.

Unfortunately, most of these withdrawals are for lifestyle – vacations, cars, renovations, big-screen TVs, etc.

Related article: Good reasons to take money out of RRSPs

Taking money out of RRSPs to pay for debt

Again, most debt is consumer debt so before you take money out of the RRSPs to pay down debt, it’s important to get to the root of the problem in the first place.

I am a strong advocate for paying down debts but taking money out of the RRSP while you are working is not great math. Pay 32% or more in tax to save 5% to 18% in interest.

Related article: Paying down debts is important

For those of you that are interested in more detailed calculations, Million Dollar Journey does a great job in laying out the math.

The proper use of RRSPs

Recently I updated an article showing the proper use of RRSPs. The basic premise is you want to contribute to the RRSP when you are in a higher tax bracket and take the money out of the RRSP when you are in a lower tax bracket. For most people, they will retire into a lower tax bracket then while they were working.

Related article: The proper use of RRSPs

If that’ is the proper use of RRSPs, then the improper use of RRSPs would simply be the opposite. The worst thing you can do is take money out of the RRSPs while you are in a higher tax bracket. In other words, don’t take RRSPs out while you are working. They are designed for retirement.


  1. Canadian Budget Binder

    I could never understand why people would bother investing in an RRSP if they are only pulling it out to pay for “STUFF” ie: boats, vacations,debt etc. I know many people that have done that all with excuses as to why but the biggest was, “it’s my money” and I can do what I want, when I want. It’s lack of education about what they are really doing when they take the money out. Everything about personal finances is a learning experience but some just don’t take the time or simply don’t know any better, or don’t give a hoot!

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