The Last-Minute RRSP Contribution, Is It Right for You?
Every year, as the RRSP contribution deadline approaches, many Canadians rush to put money into their Registered Retirement Savings Plan (RRSP) to lower their taxable income and get a tax refund. While this strategy can be beneficial, it’s not always the best choice for everyone. Before you make a last-minute RRSP contribution, here’s what you need to consider.
The Benefits of RRSP Contributions
✔ Reduces Your Taxable Income – When you contribute to an RRSP, the amount you contribute is deducted from your income, which can lower your tax bill and even move you into a lower tax bracket.
✔ May Lead to a Tax Refund – Because your taxable income is lower, you may receive a refund when you file your taxes. Many people use this refund to reinvest, pay off debt, or save for other goals.
✔ Tax-Deferred Growth – Investments inside your RRSP grow tax-free until you withdraw them, allowing your money to compound over time.
These advantages make RRSPs a great tool for long-term retirement planning, but they are not always the best option for everyone.
When an RRSP Might Not Be the Best Choice
While RRSPs offer tax advantages today, they can lead to higher taxes in the future. Here’s why:
✔ Higher Tax at Withdrawal – If you are currently in a lower tax bracket but expect to be in a higher one at retirement, you could end up paying more in taxes later when you withdraw from your RRSP.
✔ Forced Withdrawals at Age 71 – By the time you turn 71, your RRSP must be converted into a Registered Retirement Income Fund (RRIF), and you will be required to withdraw a minimum amount each year. These withdrawals count as taxable income, which could push you into a higher tax bracket.
✔ Impact on Government Benefits – Since RRSP withdrawals are considered taxable income, they can reduce income-tested government benefits like Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) due to clawbacks.
If you are not sure whether an RRSP is the best option for you, it’s important to consider alternatives.
When a TFSA Might Be a Better Choice
A Tax-Free Savings Account (TFSA) can be a great alternative, especially if you are unsure about your future tax bracket. Here’s why:
✔ Tax-Free Withdrawals – Unlike an RRSP, money you take out of a TFSA is not taxed. This gives you more control over your income in retirement.
✔ No Impact on Government Benefits – Since TFSA withdrawals are not counted as taxable income, they won’t affect OAS, GIS, or other income-based benefits.
✔ More Flexibility – You can withdraw money anytime without penalties, and the amount you withdraw is added back to your contribution room the following year.
An RRSP can be a powerful tool for retirement savings, but only if it fits your overall financial plan. If you are unsure whether a last-minute RRSP contribution is right for you, it’s best to evaluate your current and future tax situation before making a decision.
Need help deciding? Every financial situation is unique. Let’s talk about your goals and find the best strategy for your retirement savings. Book a consultation today!
This article provides general information only and should not be considered legal, financial, or professional advice. You should consult a qualified professional for guidance tailored to your specific situation. While the information presented is believed to be accurate and up to date, its completeness and reliability are not guaranteed. The views expressed are those of the author(s) as of the date of publication and may change without notice. No endorsement of any third parties, their advice, opinions, products, or services is given or implied by Upsurge Financial Services Inc. or its affiliates.
