Retirement » RRSP/RRIF

When should you not buy an RRSP?

When should you not buy an RRSP?

A lot of articles this time of year encourage you to buy RRSPs. In fact, the RRSP is one of the best tax planning strategies available to Canadians. However, there are increasing critics of the RRSP because while you may get tax benefits on the way into an RRSP, you have to eventually pay the tax on the way out.

That being said I do think the RRSP makes sense most of the time but not all of the time. So when does it not make sense to buy RRSPs?

Know your marginal tax rates

I’ve always stressed the importance of knowing what your marginal tax rate is when it comes to RRSP planning. The reason is the deduction you get is based on what your marginal tax rate is. For example, if you make $50,000 per year, you are in a 30.5% marginal tax rate (Alberta plus Federal rate). If you make a $1000 RRSP contribution, you will save $305 or 30.5%. The higher the tax bracket, the bigger the tax savings. The lower the tax bracket, the lower the tax savings.

Alberta Marginal Tax

Lower LimitUpper LimitMarginal Tax Rate

Related article: Marginal tax vs Average tax

You also need to know your marginal tax rate at the time you take money out of an RRSP. In the same example, if your income is $50,000 and you take $1000 out of an RRSP, you would not get $1000. In fact, you would only get $695 because you would have to pay 30.5% in taxes.

What’s the ideal situation for RRSPs?

The ideal scenario is to put money in when you are in a high marginal tax rate (36% for example) and take it out when you are in a low marginal tax rate (25% for example). In this example, you would be ahead by 11% just because of tax planning. On the other hand, the worst situation is to put money into an RRSP when you are in a low marginal tax rate (25%) and take it out when you are in a high marginal tax rate (36%). In this situation, you would be losing 11% due to poor tax planning.

Related article: The proper use of RRSPs

When should you not buy RRSPs?

  1. If your income is too low and you will not benefit from the tax deduction. Some suggest that if your income is below the first upper threshold of the lower marginal tax bracket, an RRSP may not make sense. This is about $48,500 of taxable income. If your income is under $20,000 if really does not make sense to buy an RRSP.
  2. If you will be in a higher tax bracket in retirement than when you are working. It’s rare, but it happens. For example, Martha owns her own business and spends next to nothing. She reports personal income of $33,000 per year. As a result of being a saver, she has accumulated $750,000 in RRSPs, $500,000 in investments and her business is worth at least $1,000,000. Her retirement income will be greater than $33,000, especially if she does not start spending some of her money. Martha should not buy RRSPs.
  3. If you have too much money in RRSPs. Some people just have too much success in their RRSPs and should not buy more. For example, George worked in the tech industry at the right time. His RRSP grew to over $1.5-million, mostly because he had stocks like Nortel and Microsoft and sold most of them at the right time. He now has a tax liability because he will have to pay tax on all the money earned. There is no point putting more into RRSPs.
  4. If you might be in a higher tax bracket in the near future, an RRSP contribution works as a tax deduction against your income. Any deduction saves you money in tax equal to whatever your marginal tax rate is. For example, in 2019, Betty earned $46,000. She expects that her income in 2020 will rise to $50,000 because she is working in a new job. The tax bracket cutoff (where you move from one bracket to another) is $48,535 in Alberta. If Betty claims a $1,000 contribution in 2019, the deduction will be worth 25 per cent. If she waits until 2020 to claim the contribution, she will save 30.5 per cent in taxes (because she is in a higher tax bracket).

While these situations are not the norm, they do happen from time to time. It is just as important to be aware of the situations where an RRSP may not make sense as knowing when it does make sense.


  1. Boofus

    Also, you have to emphasize that within an RRSP interest income, dividend income and capital gains are going to be treated equally when they are removed from an RRSP. Outside of RRSPs, the latter two are taxed at much lower rates and you only pay tax on 50% of your capital gains anyway. Inside the RRSP, once it’s yanked out even at 71, you’re taxed on 100% of those gains, aren’t you?
    Stick with TFSAs until you start earning over $50,000 a year and then the RRSPs are tax-efficient.

    • Lumi

      You are not taking in account that RRSP allows you to reinvest your saved tax money to the same RRSP. No other investments can beat that, even if you pay only 50% of taxes on capital gains from other investments, and 100% on gains from RRSP.

  2. Tommy

    I like your post, and what you say makes sense to me, but I have a question? Forgive the ignorance but I’m still trying to get my head round RRSPs since moving to Canada and what I’d like to know is if its sensible to make a contribution that would ensure I drop a tax bracket or is the aim to be at the lowest point in the highest tax bracket?

    $7k would take me down to the next bracket, I have room for $10 and I have $8k in savings.

    Any input appreciated.

  3. Calin

    Scenario #2 is a little unusual.
    […Martha owns her own business and spends next to nothing. She reports personal income of $33,000 per year….] – this probably means many personal expenses are paid as business expenses.
    [As a result of being a saver, she has accumulated $750,000 in RRSPs…] – really? $33,000 * 18% is $5,940; ignoring gains (or losses), $750,000 is over 126 years of contributions.

    • John Feesey

      If she invested(and fortune smiled) in mutuals or stocks over a number of years,in a self directed RSP, it is possible to attain this sum.

    • Grant

      Why ignore expected gains? Investing $5940 for 35 years in stock market index funds, even using today’s lower expected returns of 7%, will give you $942,024. Using historical returns of 10% will give you $1,937,801.

      • Hello!

        10% return is on the good time but you forget there is a recession cycle every 4 years. As long as the Democrat does win the US election. Your job or investment might reduce to nothing. Green new deal means all airports will shut down.

  4. SAS

    Good point Calyn!

  5. Grant

    How much is too much in an RRSP. In other words at what level should one stop contributing?

  6. Sam

    Hi every one quick question. Should i put money into an rrsp or a tfsa or something else for 2014? Here is my scenario. I worked January til June 2014 as self employed and made about 60k gross, I will be paying taxes on that money and I will be paying hst as well. My RRSP max is 18k, Which vehicle is best for me? Thanks Sam

  7. Nancy Rahman

    Sam: TFSA is a really good option for saving because you don’t have to declare any interest earned on them.If you need the money you can withdraw anytime without having any tax implications. RRSP however will give u the option to defer your taxes and will help get a tax deduction Hope this helps…I would do both

  8. Claudia Sofia

    Okay so, if I’m reading right, let’s say I’m earning $ 70K so my bracket is somewhere in the 30% mark, I work until I am 64, then I quit my job and work as a greeter in Wallmart with an income of $ 15K, at 65 years old, I start cashing my RRSP, the tax bracket at which I will be taxed would be the minimum since my tax bracket by the time I’m 65 years is so low, right???,

  9. David

    I’m wondering if I should still contribute to my RRSP. I’m 60 and retired with an income of about $26,000 per year.

  10. Flo

    I’m now withdrawing from my RRSP, and yes, I’m in a higher tax bracket than when I contributed in my early years of employment… So I’m one of those who ‘has too much in my RIF’ and am paying higher taxes now than in the 80s when I contributed. I’ve had reasonable returns over the years and make myself feel better by realizing that I may NOT have save the money if I hadn’t had the option of an RRSP perhaps I wouldn’t have saved the money… And when paying more taxes is my problem, I must be in good shape financially. So… I pay the taxes and enjoy the great life we have here.

  11. Steve

    You know what Flo? That’s the bottom line. Even though you have to pay MORE taxes, you are enjoying what you’ve saved. I will be retiring in a few years, and my income with drop accordingly. That’s when I will start using my RRSP’s as the tax rate will be lower. Either way, I will enjoy what I’ve saved. I will have a good pension through HOOPP as well as my CPP and OAS once I turn 65.

  12. Eric Purdy

    About situation#4, the tax bracket is at 45k like you said, but that doesn’t take into account the basic personal federal and provincial amounts does it? If you made 45k, you would claim your basic personal amounts of around 15k and it would reduce you taxable income to 30k wouldn’t it? So in fact, dont you have to add your basic personal amount to your total income before you actually fall into the next bracket? So in your example, when she makes about 60k, Thats when she would truly start paying a higher tax rate right, because she would claim the basic personal amount of 15k and thus would reduce her income to 45k, about to cross the next bracket. Am I wrong?

    • Doug Runchey

      Hi Eric – “Basic personal amounts” etc don’t reduce your taxable income any longer (I haven’t got a clue how long ago that changed), they just create “non-refundable tax credits”. So “Yes”, you’re wrong.
      Note: In case you’re interested, I did some homework and it was 1988 when the basic personal exemption stopped reducing taxable income and began being a non-refundable tax credit instead.

      • Reader

        The basic personal amounts are both represented in the charts above.

  13. Debresion

    I’ve $35,000 income in 2017.And the bank is not allowed to me open RRSP. because due to low income. Is that make sense guys.

    • Andy

      That does not make sense you can always open an account and contribute if you like

      For lower income it makes more sense to invest in tfsa as you are not saving as much in tax due to lower tax bracket

      • Books

        When you contribute to an RRSP is not what matters. It’s when you claim that contribution: claim it in a year when you have low taxable income, and you will get a smaller tax refund than if you claim it in a year when you’re in a higher tax bracket.

  14. Raymundo

    WHy don’t you also mention that RRSP is basically theft from the govt: not only (for some bizarre reason) you have to pay MARGINAL TAX RATE (not income tax, but MARGINAL income tax), but also you will make yourself ineligible for GIS. Nice little touch by the government there.

    • Books

      1) Unless all of your income is below the federal basic personal exemption of about 13k, some part of your income is always in a ‘marginal’ (I.e.: incremental) tax bracket of one sort or another.

      2) It may be over simplistic to say that it’s your RRIF withdrawal specifically that is being taxed at at your top marginal tax rate. Which income did you actually earn/take that put you into the next tax bracket?

      Your minimum RRIF withdrawal?
      Or something else? This answer will vary from one person to the next, and may be different for the same person from one year to the next.

  15. Hannah

    This article has given me lots to think about, thank you! I have a question, suppose my husband and I both work in a job that has a defined benefits pension plan and are probably able to retire with an unreduced pension, should we still have an RRSP? or put less into it?

    • Reader

      Absolutely, still put money away in an RRSP and/or TFSA (I’m still getting a handle on which is best to use when, but DB pensions are only designed to provide so much income, and they drop substantially (oat least mine will) when you become eligible for the CPP.

      I prefer to put away as much as I can, so I’ll be able to travel, earlier in my retirement, and later, be able to afford quality care when I need it most.

      At least in my case (15+ years to go), all these costs will be substantially higher than they are now. They’ll also keep increasing once we retire. I’m expecting my own d/b pension benefits will not necessarily increase as much as my own costs (at least once I need more health services, since not all are covered, then assisted living, etc).

  16. Martine

    Your tax bracket will be the sum of all your income. So if you make 15k (and why are you working at a greeter in Walmart anyway), you’ll add whatever you withdrew from your RRSP plus any other income and will be taxed on that total. However, I think 30% is automatically deducted and if your marginal rate is lower, you’ll get it back when you do your tax return.

  17. Alex

    Hi all, I’m from Québec. I’m a public employee and I have The Government and Public Employees Retirement Plan (RREGOP). It’s a defined benefit plan that is indexed each year to take into account the increase in the cost of living. My TFSA is also max out since the last 2 years and I am planning to max it out every year until retirement.

    I still have 30 years to work.

    Knowing these information, my question is the following: Is it still worth it to invest in my RRSP now, even though I will make more money when I retire ? I understand the concept of investing in the RRSP at a higher marginal taxes bracket, and withdraw the RRSP at a lower taxes bracket, but I have extra money that I could invest.


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