When should someone not put money into an RRSP, but put money elsewhere - such as a TFSA or a non-registered account?
Andrew, This is a very good question. Unfortunately, there is no one simple answer because it’ll depend on your specific situation. However, there are some general principles that can help you make the appropriate decision. Typically, the higher your tax bracket the more sense it makes to deposit funds into your RRSP and the lower your tax bracket the more sense it makes to do something else.
For example, if you are in the highest tax bracket, the hierarchy of your funds should be RRSPs, nondeductible debt, TFSAs and lastly non-registered investing. If you are in a low tax bracket, RRSPs typically do not make any sense and thus the hierarchy should be paying off your nondeductible debt, investing in TFSAs, non-registered investing and finally RRSP investing.
If you are in the highest tax bracket, for every dollar you put into an RRSP you’re going to get at least 40 cents back but if you are in the lowest tax bracket, you may only get between 10 and 15 cents back. In addition when you finally retire, all the funds that you withdraw from your RRSP are fully taxable; therefore, if you are in a low tax bracket you may lose out on some government benefits as your income may be too high if you saved for retirement using RRSPs (which are fully taxable) rather than TFSAs (not taxable).
When making the decision of what to invest in, you are trying to balance the competing objectives of paying lower taxes, saving for retirement, paying off your debt and maintaining your desired lifestyle. Ultimately, that will depend on your own financial situation.
Clay Gillespie, a certified financial planner and chartered investment manager, is a financial adviser and managing director at Rogers Group Financial in Vancouver. The views expressed are those of the author and not necessarily those of Rogers Group Financial, which makes no representations as to their completeness or accuracy.