With tax season around the corner, people have been scrambling to get their last minute RRSP contribution in before the March 1st deadline. As I write this article, I wondered whether most people even give any thought to having to pay the tax back at some point in the future. RRSPs are a tax deferral not a tax savings. I think that people forget about this little detail.
The practically instant gratification of tax savings seems to be more important than the tax planning for the future. While RRSPs certainly have a place for a lot of people, it is not a one size fits all option. Each individual should be looking and planning what makes sense for them now and how it will impact their future taxes.
In previous years, before TFSAs, it made sense for most people to contribute to a RRSP. The reason had nothing to do with the tax deferral but everything to do with actually saving money for the future. A lot of people need motivation of some kind to actually save for their retirement. Having an opportunity to defer taxes was enough to get Canadians to fund their RRSP accounts. The fact that they ended up with a big pool of money was a bonus. The money was put in to get a refund of taxes, in most situations. Fast forward to the present and since 2009, Canadians 18 years and older have as much as $63,500 or $127,000 between a couple that could be growing in a tax free savings environment. Tax free not tax deferred. I know you have to use after tax dollars to fund the TFSA, but you will never pay income taxes again on this money for the life of your plan. This allows down the road tax and income planning that may minimize total taxes paid while living with a higher annual income.
Don’t forget the more you take from your registered plan to live on the more taxes you will have to pay and the more potential for OAS claw backs. So think about tax planning throughout the year and really consider if RRSPs are right for your situation. After all you can choose to pay your taxes now or pay them later, but make sure the decision you make will benefit you and your retirement. Just a thought.