Who should NOT have an RRSP?

Less than 40% of folks who can contribute to an RRSP will this season if we follow the trends of the past. And gobs and gobs of RRSP contribution room will go unused. It’s a travesty, such an opportunity being wasted.

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Of course not everyone sees it that way. All the folks who consider an RRSP to be a bad idea – think of all the tax you’re going to have to pay when you pull the money out! – are leaving some folks confused as to whether an RRSP is a good idea or not. Maybe they should skip the RRSP and just go with a TFSA. It’s all so confusing.

So who might NOT benefit from an RRSP? There are some people who might be better off focusing on a TFSA, but only if they fall into one of the following groups:

Low income: If you have a low income and it is taking all your money just to make ends meet, you might want to skip the whole guilt thing over not contributing to an RRSP. Look ahead a bit. If you’re going to be able to make do with the income CPP and OAS provide, then squirrelling away whatever you can manage in a TFSA would make more sense.  And if you’re going to have an income that lets you qualify for the Guaranteed Income Supplement ($15,888 in 2011, not including OAS), then using a TFSA will also work better for you.

Low tax rate: Claiming a deduction for an RRSP contribution at a low tax rate, piling up a stash of cash, and then paying more in tax when you cash out at retirement makes no sense. If you think you’ll likely always be at the lowest tax rates, go with the TFSA. But if you think that over time your income and tax rates will increase – Imma talkin’ to you young’uns – then go ahead and make your RRSP contribution and hold the deduction for when your taxes are higher and you’ll get a bigger refund. You can then use the taxes you save to pay down your mortgage or fund your TFSA contribution.

Old or pretty close to retirement: If you haven’t made any RRSP contributions thus far, and you’re only going to be saving a small amount ($5,000 or less), and you’re not in the highest income tax bracket, go with a TFSA.

Great pension plan at work: Having a great pension plan at work means you may find yourself already paying more tax than you want to when you retire. Having a whack of taxable income in an RRSP will be less than optimum. If you’re concerned about losing your OAS to the clawback that starts when your net income is $67,668 (in today’s dollars), go with a TFSA instead of an RRSP.

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