Linda, a University student, is on the financial ball and considering starting her RRSP contributions but is wondering if it’s the best choice.  Here is the question:

I am going into my 3rd year of university and just started a well paying summer job. I have been hearing about RRSPs since high school and the value of starting it early.  As this is my first job I have not reported income before this year. I already have a TFSA so perhaps it is simpler just to put my earnings there. It would be beneficial putting it in the TFSA if I needed to make a withdrawal, right? (because then there would be no penalties for withdrawing my money)

Are there any benefits for a student like me to start a RRSP at this stage? I couldn’t find much information targeted to my scenario, but I guess I am just an early and avid business student.

To start, RRSP contribution room is based on 18% of the previous year earned income + any unused contribution room from previous years.  In this case, Linda states that she has never reported income before, thus I’m going to assume that she hasn’t built up any RRSP contribution room yet.  However, even if she does have RRSP room available, should she contribute?

To me, it doesn’t make a lot of sense to contribute to an RRSP at this stage of her life as her income is low, thus the tax refund would be low.  The goal of the RRSP is to contribute during high income working years and withdrawing during lower income retirement years.  The higher the tax bracket, the greater the advantage of the RRSP and the opposite is true.

If Linda is dead-set on using the RRSP, then I would suggest contributing but carry forward the tax deduction for future higher income years.  This way, she gets to take advantage of the tax deferral of the investment gain within RRSP, let her investments compound without tax drag, and look forward to large tax refunds in the future.

One issue with putting all your savings within an RRSP are the withdrawal penalties.  Although Linda may be in a low tax bracket, thus withdrawals would face minimal tax, there is still the RRSP withholding tax upon withdrawal.  In other words, upon withdrawing the first $5,000, 10% would be withheld and a greater percentage as the withdrawal amount increases.

To avoid the RRSP problems in this case, the Tax Free Savings Account (TFSA) provides an ideal location to store savings.  While the deposits do not get a tax deduction, the withdrawals are not taxable or penalized in any way.  The icing on the cake is that most gains within the account are not taxable.  As Linda is a student, I’ll assume that she may need liquidity to pay for her studies in the upcoming semester, so I would suggest to continue putting cash in her TFSA.

Did you contribute to an RRSP as a student?


  1. Beth on July 27, 2010 at 9:13 am

    During university, all of my money went towards university! (Graduated with no debt though).

    I’d second the idea of putting the money into a TFSA investment vehicle. She can already claim tuition, I’d doubt she’d get much back from doing an RRSP.

  2. Ben on July 27, 2010 at 9:28 am

    I used a gold-plated shovel to bury myself under a mountain of debt during school.

    TFSA would probably be the best way to save during school.

    RRSP carry-forward would work too. You’d want to have a reasonable chance of earning an income somewhere north of 40k in a relatively short time after grad before going this route.

  3. Steve R on July 27, 2010 at 10:06 am

    In hindsight, I really wished I had contributed to my RRSP while in school. Any amount would have been beneficial as it would have grown with time. Small amounts do add up in the long run and that’s what the RRSP is all about…for retirement.
    Yes, paying for school is challenging. I spent 9 years post secondary and the debt was high and at 12% interest, but I paid it off aggressively. I believe any student can find $100 to add to their RRSP during school, although, most are not taught/shown how to budget for it. With that little contributed, you won’t get much of a refund, but if that’s what you are after, you are missing the point.
    Just my thoughts as I think back to what I should have done.

  4. GeniusBoy on July 27, 2010 at 10:22 am

    I contributed to my RRSP while I was in school, but I was making a reasonably good income, and I just wanted to get in the habit of saving.

    Given the options now a day, I do the TFSA first before the RRSP.

  5. Ian on July 27, 2010 at 10:43 am

    Max out the TFSA and then go with low cost Canadian Dividend paying products in non-registered accounts, or just cash in a regular savings account if you’re drawing down on the funds for school. Between the basic personal amount and education tax credits, unless you’re making around 16-17k and above in those 4 summer months, you won’t be paying much (if any) tax.

    When I was in school, the only time I didn’t get a full tax refund was when I worked 8 months of the year rather than 4. You can make a RRSP contribution and carry forward but it doesn’t gain you anything other than having your assets locked up, since you most likely won’t be making enough to pay tax on the gains anyway (and you get a dividend tax credit until you’re above ~40k in income). As a student you absolutely need liquidity. It may take a while to find a job after graduating. Maybe you want to do a graduate degree. Maybe you want to travel halfway around the world to “find yourself”.

    I was in school before the TFSA, and kept my short term savings (what I needed for ~1 year of school) in regular taxable accounts and medium-longer term in a non-registered mutual fund account paying primarily Canadian Dividends.

    My partner is currently doing a PhD and does pretty much the same, except her school expenses can now be held in a TFSA. She has a bit in an RRSP account from when she was working before going back to school. She’s still carried the deduction forward as she’s been able to get all her money back so far just from the basic personal amounts, education tax credits, and dividend tax credits.

    When you can get a full-time job and make enough that a RRSP tax deduction nets you a considerable refund, then you can do a transfer-in-kind of your non-registered account assets.

  6. Mike on July 27, 2010 at 11:07 am

    I just started contributing now to an RRSP at the age of 21, in my 3rd year of university. Everyone claims withdrawal penalties as a downside to RRSPs, but that’s kind of the point. Think of money contributed as money spent, and feel good that you’ll have a sizeable sum by the age of 65 if you start early. I plan to also open a TFSA to make use of tax-free investing, but at the same time I can get the funds out in an emergency.

  7. Sampson on July 27, 2010 at 11:23 am

    I started contributing to my RRSPs at around 13-14 when I started to work, did so consistently through high school undergrad and grad school and I’m very glad I did. However, I never started maxing out contributions until I started to earn real money.

    I think its a good thing due to the time value of money and the benefits not of the tax refund, but the tax sheltered growth. Now, TFSAs should probably be used first, but we didn’t have any other options ‘back in the day’. ;)

    For someone so early in their ‘saving’ career, I would think it is more important to get the ball rolling and getting used to monthly contributions etc. The actual $ benefit of saving RRSP contributions for later in the work career is probably insignificant given that people probably aren’t going to contribute much at this time.

  8. larry macdonald on July 27, 2010 at 11:46 am

    About the only thing I would do differently is check with Linda to see if she has any interest-bearing debt like credit cards or a car loan. If so, maybe pay that down first.

  9. The Passive Income Earner on July 27, 2010 at 12:59 pm

    I never contributed as a student. I started contributing once I started working. It did not take me long to reach 20K$ which I used for my first house. Nowadays, I am not focused on my RRSP and maximizing it though. You need to understand the tax treatment of your investments

    If the intention is to build a saving habit, I would consider to DRiP solid blue chip companies that pay strong dividends. The amount can be variable and you get to see your money at work. I am setting up my kids with this system.

    I agree with many that TFSA should be used before RRSP. Especially when you don’t have a high income to benefit from higher tax saving.

  10. saveddijon on July 27, 2010 at 1:10 pm

    For a student in co-op, RRSP can be an income leveling strategy.

    If you are in co-op, you alternate 4-month academic terms with 4-month work terms. In one year, you may have two work terms and one academic term. You will have lots of income, and little tuition to deduct. The following year, you will have two academic terms, and only one work term. Little income, but more tuition to deduct.

    So: you level: in the year with two work terms, contribute to the RRSP and take the tax deduction. The following year, if you need the money, cash in the RRSP, take the tax hit, but then deduct your two academic terms worth of tuition. The result is that your income is more evenly spread out and you may pay lower taxes.

  11. Brandon on July 27, 2010 at 2:36 pm

    I was in the same situation 5 years ago. I did not put into RRSPs and instead held it in a savings account (there was no TFSA at that time). Two years after I graduated I was making twice what my co-op was paying me and I had 20k available room to drop in my RRSPs. The money that came back from the goverment went back into savings (now into my TFSA) and now all the savings I’ve accumulated is going towards my first house.

    In my situation I’ve used the RRSP and the goverment return as part of the HBP — more of a wealth/cashflow strategy. However, Linda may not want to do it that way. Perhaps she is keen on growth and getting a head start in retirement. If that’s the case, maybe getting a head start on her RRSPs isn’t a bad idea.

  12. Ben on July 27, 2010 at 4:07 pm


    This idea caught my eye, but after noodling it a bit, I’m not sure it’s a real benefit. Maybe I’m missing something by not working out the numbers, but here goes.

    It does level the income, but the purpose of that leveling is unclear. Unless there’s net tax savings, it’s hard to see the point. For a $25/hr co-op job (for the sake of argument), the student is going to be in the lowest tax bracket (9k to 37k in Ontario) regardless, earning $33k in the 2-term work year, and $16.5 in the 1-term work year. Any alchemy with the RRSP deduction and tuition credit has the same value (20.5% in Ontario) regardless of the year it’s used. The total tax paid over those 2 years is the same.

    Granted, for income scenarios which overlap on either end the 9-37k income bracket, there may be some tax benefits. This would be in $13/hr range on the low end, and $28/hr at the high end.

    One benefit of your plan is the fact that the money in the RRSP is less likely to be spent than sitting in the bank account. So in the low-income year that follows, it will still be there to be pulled out and put to use if required. And if not required, it will compound tax-free (until withdrawal).

  13. youngandthrifty on July 27, 2010 at 5:22 pm

    I completely agree. Back in my day (lol I am dating myself) there wasn’t the TFSA, and I didn’t contribute to an RRSP because I didn’t have much income. I kind of wish I waited use the RRSP deduction room until my income was higher, because I remember maxing it out when I got my first job after graduation of that year, and the income wasn’t that much. I think the TFSA is a great solution for the student, but be the wise student must be careful about withdrawing and redepositing into the TFSA recklessly, or else those pesky penalties will be incurred. =)

  14. Ryan Atlas Financial Planning on July 27, 2010 at 6:34 pm

    Prior to the TFSA I would have suggested putting the money in the RRSP and waiting till later to claim the deduction, as long as the person was resonalble sure they would not be taking the funds out at least until home purchase.
    With the introduction of the TFSA I would not recommend anyone to put funds in a RRSP who is in the bottom tax bracket unless they think the tax penalty is the only way to stop them from taking the money out for needless spending.

  15. DanP on July 27, 2010 at 7:14 pm

    I think the world would be nuts to put money into an RRSP when your not making any realy money. The point is to take out RRSPs when u are in a smaller tax bracket. When would you ever be in a small tax bracket then when ur in University? I wouldnt even recommend putting money into RRSPs the first few years of you work. Why not save that room for when ur making more money. And if your 22, and you plan to retire at 65, how could you possible predict what income tax rates will be in 40 years. That’s a gamble i’d never take.

    At that age, TFSA is a no brainer to me.

  16. JFG on July 28, 2010 at 9:56 pm

    Actually, investing, period, makes sense.

    Yes, TFSA makes sense over a RRSP, but for me, a DRIP account might make even more sense.

    In any case, start investing now is key.

  17. Popsicle Pete on July 28, 2010 at 10:31 pm

    I wouldn’t use an RRSP in college. Put it all in a TFSA or just save it. I personally know it is VERY difficult to plan ahead more than a year while in college. And while you may have 10k kicking around with nothing to do you never know what going to come up. Maybe you’ll get an amazing research opportunity but will have to sacrifice a summer job. Or maybe you’ll change majors and your entire school schedule will change. Having money “locked” away may be a bad thing.

    Also, while it’s not exactly on the up and up, for student making not too much (<12k or so), in a year, you're probably eligible for some sort of student loan. And if you can "give" that 10k you have to parents or siblings you may stand to get several thousand, instead of nothing, in interest free loans. In addition, some of your loan money is often bursary money. And if you apply for student loans, that may also qualify you for all sorts of other tuition reductions or university bursaries.
    Just something to keep in mind.

  18. Ruth on July 29, 2010 at 12:42 am

    I guess I need to start contributing to RRSP. I am currently making about 70k and in my forties. Just got a good job. Can anyone please tell me what would be the best investment I should make within the RRSP? My partner and I are also planning to buy our first home and we are planning to use the HBP. Any suggestions would be very much appreciated.

  19. Moneyedup on July 29, 2010 at 1:28 am

    In my grade 12 calculus class I was taught the mathematical significance of investing early and diversifying my investments. I also quickly learned just how much school was going to cost me. Students are in a sticky situations because many of them are in debt due to student loans, and yet the early 20s is a good time to start your RRSPs. I would say to start investing as soon as possible, but to make sure that you have a plan in place to pay off any student debt before you lock away money in RRSPs.

  20. Todd on July 29, 2010 at 3:48 am

    NO, NO NO and NO.

    I was making approximately 35k while attending college and university in the early 2000’s. At 35k I might have been in the 23% bracket (live in Alberta), but now I’m in the highest tax bracket and wish I had saved my room until such time as I was in the highest tax bracket. It only makes sense to take the money and put it in a TFSA now and save the RRSP contribution room until you are in a higher earning spot. Then shift it into a RRSP 90 or 180 days (can remember which) before you plan on buying a house/condo and with draw it to buy your living space. Then only slowly repay your RRSP while maxing out the TFSA for a few years, then contribute to your RRSP a whole chunk before you get married or have kids. Alternatively, if you are unemployed for a year and just went from a high income tax bracket, to a low one, then it might make sense to withdraw from your RRSP while you are in a low wage earning year and take the tax hit and move the money into a TFSA until such time as you are back in a higher tax bracket. I plan on withdrawing a chunk of cash from my RRSPs in my mid 30’s and going on a holiday for a year and not working as by my calculations, I’m saving more then I’ll need for my retirement. Plus you m Does this make sense?

  21. Ryan Atlas Financial Planning on July 29, 2010 at 12:37 pm

    If you are in your 40’s and have not started to save for retirement yet, then I would say you need to get in touch with a financial planner to have a plan put in place. The overall financial plan is more important then the specific investment recomendation.

  22. Geoff on July 30, 2010 at 11:20 am

    @ Ruth – with respect to Ryan, I think you need to read and research more, and act leses. Do not go into a financial planner meeting without understanding what the following are: MER, rate of return, equities, bonds, stability, security, fees, time horizon. Read this blog and

    Personally given your time horizons are SHORT (you want to buy a house, I assume sooner than later) than I think you should consider just opening an RRSP and putting the cash in there as a GIC or savings account. You can’t afford loss of that principal and have a short horizon. An RRSP is a vehicle, not a mutual fund – you can have cash, gics, savings account, stocks, bonds, whatever inside an RRSP. But before you think about doing what I suggest here, learn all you can. Act rashly and repent in leisure, applies here…

  23. Ruth on July 30, 2010 at 10:01 pm

    Thank you all so much. Thank you very much Geoff. In fact, the idea about seeing a finanical planner really scared me but Geooff your suggestion sounds really good to me. Yes, I need to understand all those terms. It feels like I am a bit behind given my age and all that. I spent so many years in university, but better now than later. Will do just that. certainly given my circumstance, I cannot afford to lose any principal at this stage. I will open RRSP and start some TFSA as well. Thank you once again!
    Thanks for both websites. I have actually started reading them of late, THANK YOU!

  24. Jeff on August 3, 2010 at 11:50 pm

    I believe I read here that RRSPs aren’t necessarily of any value when, in retirement, one takes pension clawbacks and other reductions into account. If so, this article continues to perpetuate a myth.

  25. Ed Rempel on August 4, 2010 at 2:49 am

    Hi Jeff,

    While your comments are true, they don’t eliminate the value of RRSPs for most people. The clawbacks apply at some tax brackets and not others. After you retire, you can determine how much to withdraw each year and plan to minimize the effects of the clawbacks.

    There are essentially 2 benefits of RRSPs:

    1. You may be in lower tax bracket after you retire.
    2. You pay no tax on the investment income over the years.

    The first point needs to be looked at for every person, since it may or may not be true (with the clawbacks).


  26. Hyacinthe on March 27, 2016 at 1:28 pm

    The best way to do it would be to contribute to TFSA so the money grows tax free within it, and when she has higher income to use TFSA assets to contribute to RRSP in kind. This way she would get a larger TFSA room and RRSP deduction in her higher earning years.

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