Different Choices Maximize the RRSP Net Benefit

Abstract

Canada’ Registered Retirement Savings Plan (RRSP) is a tax-deferred account intended to help workers save for retirement. This paper dis-proves the accepted ideas about its benefits: A. The contribution’s tax reduction is a benefit itself. B. The tax reduction at contribution allows for a larger account, producing larger profits. C. Profits are deferred but taxed on withdrawal. D. A bonus from lower tax rates on withdrawal can be expected. E. There is a benefit ‘from deferral’. F. The Home Buyer’s Plan creates a benefit. The author presents a math proof and conceptual model showing the RRSP’s net benefit is the sum of five independent factors. 1. Profits are never taxed. Not while in the account and not on withdrawal. This benefit always exactly equals the same benefit from a TFSA. It is the only factor everyone receives. 2. A bonus (or penalty) is created by withdrawal tax rates lower (or higher) than at contribution. Both are possibilities. 3. Benefits from other income-tested programs are lost in retirement (and gained when young). 4. There is a growing cost from any delay in collecting the contribution’s tax refund. 5. The Home Buyer’s Plan more likely has a negative benefit. Twenty examples of common advice are re-evaluated. Different choices result from the different understanding of the RRSP’s net benefits.