Hopefully, most of you know what an RRSP is. For those who don’t, RRSP stands for Registered Retirement Savings Plan and it’s one of the only tax (and largest) deduction/deferral tools that employed Canadians have. The RRSP account can be opened at any of the big banks along with some online brokerages, and allows your investment growth to compound TAX FREE. On top of that, all contributions for last year, up to March 1 of this year can be deducted from your income. This will equate to a tax return of the sum of your contributions x your marginal tax rate.

For example, if I contributed $6000 to my RRSP for 2006 (up to March 1, 2007) with a marginal tax rate of 38%, I would get a tax return of $2280 ($6000 x 38%). The tax return is free money right? Not so fast, RRSP’s are a tax DEFERRAL tool where you are taxed at your marginal rates when you WITHDRAW. So when it comes time for you to retire, hopefully you’ll be in a lower tax bracket than when you were working.

Now that we’ve gotten some of the formalities out of the way, the question that this article is going to try to answer is, who should contribute to an RRSP?

The simple answer is, anyone who is employed and expects to be in a lower tax bracket when they retire. The real power of RRSP’s though is the ability to let your investments compound TAX FREE. For example, if you were to contribute $200/month to your RRSP at the age of 20, you’d have almost $650,000 in your RRSP at the age of 60 (assuming 8% growth). If you wait until you’re 30 before you contribute, you would have $284,000 at 60. The power of time cannot be understated.

How about a new graduate from University in a low tax bracket?

Even though you are in a low tax bracket, I believe that your RRSP should be “started”. Any deductions can be carried forward to a future year when you reach a higher tax bracket. You young folks out there, take advantage of the power of time and compounding. You can also withdraw from your RRSP in the near future towards the down payment of your first home (HBP).

How about those permanent low income earners?

Low income earners who expect to stay in the same tax bracket for their career should NOT contribute to an RRSP. Reason being is that being in the lowest tax bracket will provide little tax benefits. On top of that, upon retirement, government benefits like GIS (guaranteed income supplement) may be clawed back if you have an RRSP that exceeds the maximum income requirement.

That’s all for now, comments?


  1. DAvid on August 24, 2008 at 7:03 pm

    Unless you plan to have a joint retirement income of considerably less than $20,000 or so in today’s dollars, the GIS will be of little benefit to you. It is likely that the income from the CPP you are already contributing will create retirement income that will reduce your GIS to or near 0. It would appear that you and your wife have a family income in excess of the Canadian average, and as such, it should be to your benefit for each of you to contribute to an RRSP.

    There is lots of information on the ‘net about CPP, OASP, and GIS. Have a look to learn more for yourself.


  2. Mark the Foster Advocate on December 31, 2008 at 12:24 pm

    Hi All,

    For me, I think the rules for who and when to contribute to an RRSP are simple:

    Step 1) Contribute to an RRSP only after you have eliminated most of your high-interest debt (no credit card payments, no car payments, no student loans, etc).
    Step 2) When you have no high-interest debt (say, only the mortage and bills to pay each month), contribute to an RRSP to reduce your taxable income
    Step 3) Keep contributing until you get tax refund(s) from the federal gov’t for a few years (i.e., you are slowly building your wealth)
    Step 4) Keep contributing, modestly, to the RRSPs but start using the tax refunds or the new tax-free savings accounts as a means to start buying dividend-paying stocks
    Step 5) Keep modest contributions to the RRSP but slowly transition most of your monies to buy dividend-paying stocks to fund your retirement

    So far, I’ve completed steps 1-3, I’m working on step #4.

  3. […] later in the year to meet one of my financial goals.  However, the priority is to maximize my RRSP and TFSA before paying down the mortgage any further as my mortgage rate is currently very low […]

  4. […] (100% at your marginal rate), I would be placing these equities in a tax sheltered account like an RRSP or […]

  5. Bob on May 13, 2009 at 8:53 am

    The correct answer was: “Everybody”.

  6. uberben on June 25, 2009 at 12:23 pm

    Hey FT (and fellow readers),

    I am completely new to investing and RRSPs and the whole shebang as I am still in school, but I would like to get a jump start on my financial future. Reading through a bunch of Can. finance blogs and other resources, I think I have a good grasp on how everything works, but there are a few things I just want to clarify.

    First, some background. I am 21 with 2 years (3 tops) of school left. I have about 21k in the bank including a maxed out TFSA. As a full time student currently living with the parents, I am making about 11 or 12k/yr. about 5k goes to tuition, 90% of the rest into savings. I have no debt. Shortly after graduation I am looking to buy a house (renting is for suckers!) and quite possibly get married. I will also probably buy a car (in cash, preferably). I wish I could bike year round, but Canadian winters are not so accommodating. In my back-of-a-napkin calculations I have been assuming no finances coming from anyone else (i.e. spouse, parents, inheritances) for any of these major purchases, just to play it safe.

    Now for the questions:

    1. Claiming deductions for RRSP contributions is best done in a higher tax bracket than you will be in upon retirement. As a student, I am currently not paying income taxes but would like to get a jump on compounding savings. How long can I put off deducting contributions?

    2. RRSPs grow tax free, correct? Correct me if I am wrong, but I am assuming that the tax free growth isn’t impacted by not claiming the deductions.

    3. If I were to take advantage of the HBP, can I continue to defer claiming RRSP contributions? I don’t entirely see much point to putting money in an RRSP without claiming it, just to HBP it out again, but I just want to check.

    4. If I do put some funds into an RRSP with the intention of pulling it out via HBP in a couple of years, is that a wise move? The market seems to be in a good place to buy right now, but as a complete novice, I’m not 100% comfortable diving in for the short term.

    5. While on the subject of home purchases, I’ll toss in a question about the Smith Maneuver. Since I will likely be in a low tax bracket when I buy the home, if I do decide to do the SM, it is probably best that I wait a little while for the tax bracket to jump up.

    So, thoughts?


    • FrugalTrader on June 25, 2009 at 4:32 pm


      To answer some of your questions:
      1. AFAIK, you can carry forward your deductions indefinitely.
      2. Correct
      3. I’m not 100% sure on this one, but I “think” you can continue carrying forward even though you are on HBP.
      4. If you need the money soon (within a few years), I would personally keep the money out of the market. Not unless you are a good market timer, which not many people are.
      5. SM works best for those in higher brackets, just like RRSPs.

  7. uberben on June 25, 2009 at 5:24 pm

    Thanks FT. Sounds like I am on the right track. Most of my cash has been in what was a high interest savings account until rates took a nose dive. At least I haven’t lost capital. Hopefully rates will start going up again shortly.

  8. Andrew on June 29, 2009 at 6:55 pm

    I’ve read a few articles like this recently, but most of them don’t define “low income”, which can be a somewhat subjective term. The statscan definition in 2005 was about $20K for individuals in urban centres.

    Even if you’re income is only $20K, I’m assuming you’re going to be earning less when you are retired and not working at all. So wouldn’t that meet your requirements of “anyone who is employed and expects to be in a lower tax bracket when they retire”?

    So if you are earning $25K now, but never expect to make much more than the national average of about $35K, then you’re not really a “low income earner”. So do RRSPs still makes sense? If not, then what kind of income do you need before it makes sense to contribute to an RRSP? Are there better investment options for low income earners who want to save something for retirement? I’ve read that withdrawals from a TFSA won’t involve clawbacks of the Guaranteed Income Supplement, Old Age Security payments, etc.

    What about dividend income? Would that be treated the same as withdrawals from an RRSP in retirement?



  9. FrugalTrader on June 29, 2009 at 7:58 pm

    Andrew, people in the lowest tax bracket for all their working years will find that an RRSP isn’t as effective as someone who is in the higher brackets. Like you mentioned, lower income means government benefits during senior years. Here is a more detailed article:


  10. Andrew on June 29, 2009 at 8:52 pm

    Thanks FT. I just think it’s important to use more specific information rather than vague terms like “low income”. Especially when you are in fact referring to millions of “average” Canadians who are earning less than $40K and probably will for much of their lives. How many people really see huge increases in their income after a certain age? A lot of us are happy if we can see consistent cost of living increases.

    Someone earning $35-40K knows they’re not rich, but they may not think of themselves as “low income” either, so when reading an article like this, it’s easy to say: “He’s not talking about me. So I’m going to continue to follow the advice of the person at the bank who sold me that RRSP.”

    Thanks for the link to the other article. I’ll check it out, because I’m still not sure if dividend income in retirement is any different than RRSP withdrawals for “low-income earners”?



  11. FrugalTrader on June 29, 2009 at 9:39 pm

    Andrew, you are absolutely right, I should have been more specific in the article. I will make the appropriate changes.

    Dividend income in a non-reg account gets preferable tax treatment, regardless if it’s during retirement or not. Check out my article on how dividend income is taxed:

  12. Andrew on June 30, 2009 at 1:03 pm

    In the article linked above you say “if you are over 65 the high dividend gross up may negatively affect your OAS payouts”. So it sounds like the only “investment” for retirement that really makes much sense for people in the lowest tax bracket is to pay off a home. At least then you have somewhere cheap to live after retirement, and if you have any money left over it should go into a TFSA. However, I have to wonder if there are any guarantees that the rules regarding TFSAs won’t change in the next 20 or 30 years.


  13. YYC27 on July 14, 2009 at 8:28 pm

    I think, unless you expect to be on GIS in retirement, it’s almost always a good idea to invest in an RRSP.

    Here in Alberta, the lowest combined Federal/Provincial tax bracket is 25%. Even at that rate, you can boost your investments by 1/3 ($133.33 pre-tax = $100.00 after-tax). That extra initial investment is still going to make a huge difference compounding over a working-life.


    There’s one thing I’m trying to decide for myself, right now.

    I’m about to purchase a home. I’m going to be using HBP withdrawals for part of the down payment.

    What I’m not sure about is where to direct surplus money — mortgage prepayments or HBP repayments (over and above what’s required). My RRSP contributions will already have been maxed, so I won’t be able to take a tax deduction for any payments into the RRSP (they’ll just come off as HBP repayments and go back to growing tax-free until retirement).

    So, whether it’s mortgage payments or HBP repayments, it’ll end up being after-tax money. I would get a better return within the RRSP, but the mortgage savings are guaranteed.

  14. […] contributing to my RRSP, to bring the taxable gross down & to set up for the […]

  15. Bill on October 11, 2009 at 8:43 pm

    Thanks FT.
    I have a family of 4. My wife and my 2 children. I am the only one working (35k/yr). At the moment I have neither a RRSP nor any saving account. I have 10k in my normal bank account and I would like to know what to do with the money? What would be the better option? a RRSP, Saving Bonds or a bank saving account?

    Thanks a lot!


  16. Stacy on January 27, 2010 at 11:29 pm

    Hi all,

    I’m 24 years old and I’ve been contributing my max allowed every year since I started working, I now have about $16,000+ in RRSPs. This year I made around $80k and I have $25k just lying around in my bank (already contributed my RRSPs). I have no school debts (paid off), I paid off my car in full, insurance – everything. I just pay what I need to live (rent, food, internet (lol), etc.) My question is.. where should I put this extra money? I’m scared to do anything in the stock markets and where I live I don’t have enough money to buy even an apartment. Oh, I also have $10k in a tax-free savings account (contributed my max $5k last year and $5k this year)

    Any ideas? I’m a very hard worker and I spend my money very wisely. My plan is to eventually buy my own place, but I want to be smart about it and not jump into anything just yet.

    I’m also wondering what is the best plan when putting money in RRSPs. I know there’s 2ys, 3yrs etc. I’ve been putting mine in a 3yr rising rate as my bank told me this was the best option for me but I haven’t a clue if this is true.

    Thanks for any advice.

  17. David on October 24, 2010 at 11:54 pm

    Please correct me if I am mistaken.

    As it stated on cra-arc.gc.ca If your RRSPs are not locked in, you can withdraw funds at any time According to the following rates.

    * 10% (5% in Quebec) on amounts up to $5,000;
    * 20% (10% in Quebec) on amounts over $5,000 up to$15,000
    * 30% (15% in Quebec) on amounts over $15,000.

    We do not have to wait until pension. If for example I know that in two years I am going to study I can accumulate approximately 14400cad (contribution room for 2010 for my income) +14400cad(Cont. room for 2011) = 28800cad . If I deduct these 14400cad from my 80000cad income for two years I can save approximately 10000cad in terms of tax.(depends on your provice)
    I know in advance that during my 2 years course my income will be low, lets say 25000cad. So, I am going to withdraw 14400cad yearly from my RRSP.
    Thus, 14400* 20% = 2880

    10000cad -(2880+2880)= 4240cad saved.

    I omitted marginal tax issue to make this article simpler which is not very significant here especially if my income even lower than 25000 .

    The good point in this scenario that I do not need to wait until my pension and my RRSP money will not be eaten by inflation which is about 2%in Canada. 2% multiply by 30 years =60% . I think that because my education is not less important when my pension I have moral right to withdraw my RRSP before pension and of course it is money wise.

  18. FrugalTrader on October 25, 2010 at 9:43 am

    @David, withdrawing from RRSP prior to pension is a strategy that many use to reduce tax on the RRSP withdrawals. I recommend that you consult a tax pro to verify.

  19. Dr. Philosophy on December 16, 2010 at 7:46 pm

    Two points:
    1)It is misleading to claim “On top of that, upon retirement, government benefits like GIS (guaranteed income supplement) may be clawed back if you have an RRSP that exceeds the maximum income requirement.”
    HOLDING an RRSP regardless of value does not kick in an OAS or GIS clawback. OAS and GIS clawbacks occur based on the year’s income, and RRSP WITHDRAWALS are the only thing that affects that.
    By the way, GIS is worth between $0 and roughly $10000/yr. All but the poorest/chronically un or underemployed/new to Canada get less than the full $10000 just by virtue of their CPP and OAS incomes.
    2) It is foolish to recommend that a person in the lowest tax bracket not contribute to an RRSP. A person in the lowest tax bracket can benefit from tax-sheltered growth in savings just as easily as a person in the highest tax bracket! That the TAX savings on one’s tax returns from year to year won’t be as great for a person in the lowest tax bracket who’s planning to stay there as they would be for a person in a higher tax bracket should not dissuade someone from taking advantage of tax-sheltered growth in savings. Put rhetorically, a person who is of low income would like to be worth approx 650K by retirement just as much as a person who is of high income!

    In summary, it is nearly always best to put away in an RRSP. There are circumstances where it doesn’t make any sense. But these are rare, and none of them were mentioned in this article.

  20. FrugalTrader on December 16, 2010 at 8:01 pm

    True that tax free growth is great, but remember that people MUST dissolve the RRSP at some time. So when a low income earner turns 71, they’ll be forced to pay full income tax PLUS lose their GIS income. Personally, I think the TFSA is a much better vehicle for low income earners.


  21. Dr. Philosophy on December 17, 2010 at 2:48 pm

    FT, thanks the for reply. It is only fair to point out that when you wrote this piece TFSAs hadn’t been invented yet, so you couldn’t have mentioned that option. I agree it is a good option for everyone, including low-income earners, to take advantage of. But it is not the best option: I still think you are wrong to think any person with a perennially low income should contribute to an RRSP rather than a TFSA. Let me try to show why.
    Your argument is that low income earners pay little tax on working income before retirement and will lose the GIS if they defer the tax on what little income they have into retirement.
    My response is that (legally) deferring paying taxes is almost always better than paying said taxes now. Let me explain. A low income earner with an RRSP and a TFSA faces the choice of what to do with, say, $200 left at the end of the month. He could slot it into an RRSP and get, at a brute 25% tax rate, an extra $50 on his tax refund at the end of the year. Or he could take the $200, forfeit the $50 tax he must pay on the $200, and slot it into a TFSA. Granted he has a better chance at getting the GIS if he takes the latter route. (I say chance because the rules for GIS may change between now and when he goes to collect OAS. I’m 27–I’m not counting on anything.) But think what he could do with the $50 refund *this year*. If he does choose to reinvest it I daresay the compound interest on the $50 FROM THIS MONTH ALONE will be worth quite a bit when he’s ready to retire, particularly if the low income earner is young at the moment. But even if he just goes and spends it on whatever he still has extra money he otherwise would have lost to CRA in his pocket *now*.

    It’s true that low income earners pay little tax in this country relative to the wealthy. That is a good thing which makes me proud to be Canadian. What I’m suggesting is that almost everyone, including low income earners, take advantage of the even more incredible option of being able to be, in some measure, in control of how much tax we pay in any given year. With RRSPs we are both in control of deferring current income taxes, but also in control, even after conversion of an RRSP to a RRIF, of how much income we want to be taxed on in any given year (besides the variable minimum amount which must be withdrawn from a RRIF yearly.) Deferring paying income tax is almost always better than paying it up front and saving with what’s left, the possibility of losing the GIS notwithstanding.

  22. FrugalTrader on December 17, 2010 at 3:47 pm

    @ Dr – Another thing to consider is that if the low income earner, instead, chose to invest in a non-registered account of dividend payers, they would pay very little or not tax on their dividends. Thus, in effect, if they held the portfolio for the long term, it has the same tax deferral benefits of an RRSP. And when they sell, they would only have to pay 50% of the gain, instead of 100% of an RRSP withdrawal. Yes, I agree that there are huge benefits of reinvesting the tax refund, but I’ve read that most people simply spend the refund.

  23. josey124 on August 2, 2011 at 5:50 pm

    I have a problem with my RRSP and I don’t know where else I can post this. I have an account with Questrade (RRSP) and one of my posititons CONVERTED ORGANICS INC (COIN:US) is now declared non-eligible. I purchased the shares in February and now I am forced to transfer them out of the RRSP account or sell them? WTH? I can see that they are non-eligible now and one shouldn’t be able to buy them under the RRSP umbrella but I bought them months ago. How can CRA force me to take a loss?

    Here is an excerpt from the email I got:

    The Canadian Revenue Agency (CRA) determines which securities are eligible to be held in RSPs. All non-eligible securities are taxed at a rate of 1% per month, based upon the value of the security at the time it was acquired.
    Your account currently holds the following non-eligible security (or securities):

    To remove non-eligible securities from your RSP select one of the following options:
    1. Sell the security.
    2. Transfer the security to a non-registered account.

    Note: transfers from a registered account (except TFSAs) are considered a plan deregistration and are subject to fees and a withholding tax.

    Can anybody let me know what my best option is here? Thanks!

  24. Perry on February 7, 2012 at 2:14 pm

    Hi FT!!

    I’m 23, have 20K in student loan debt, and 20K for my car. Making 43K/year. Want to ensure I’m on the right thinking page. Should not make any RRSP contributions until I have paid off my student loan and car?? Or would paying one off ie. student loan be sufficient, then make contributions to RRSP while paying down the car?


    • FrugalTrader on February 7, 2012 at 2:39 pm

      @Perry, what are the interest rates on the loans?

  25. Perry on February 7, 2012 at 2:48 pm

    Hi FT!!

    Ontario Student loan Current Interest Rate: 5.50 % Floating….car loan is at 1.99 %. I’m currently paying $300/month to student loan, and $308/month to car loan. Would you advise me paying more monthly to both debts? I’ve got a couple hundred dollar (aprox $300) wiggle room after other expenses like rent, gas, insurance etc. Thanks so much!!

    • FrugalTrader on February 7, 2012 at 3:00 pm

      @Perry, after counting for the student loan tax deduction, you are still paying an after tax rate of around 4.4%. As you are in a low tax bracket, I would personally pay off the student loan first. What is the balance remaining?

  26. Perry on February 7, 2012 at 3:57 pm

    Got it! Will do! I just checked the remaining balance..looks like I
    was slightly off….balance to date is $21,894….not fun. I realized
    if I increase my payments to $400 it won’t make much of a difference.
    I will try for $500/month. At that rate, it would take me aprox 50
    months to pay. I will also try applying for repayment assistance…in
    hopes to get a lower interest rate, or have the interest taken care
    of. Not sure how successful that will go with my current income
    bracket, but definitely worth a shot. Any other advice is greatly appreciated!

  27. Mansbridge on February 8, 2012 at 4:42 pm

    <– govt worker with pension (for now)

    23 yrs old, 51k… no debt. should i max out TSFA then start contributing to a RRSP?

    Thanks in advance.

  28. FrugalTrader on February 8, 2012 at 7:47 pm

    @mansbridge, that’s what I would do.

  29. ImprovisedEconomist on September 14, 2012 at 11:11 pm

    Having worked through the math, I would say that most people should max out their TFSA contribution before they contribute to their RRSP. RRSPs are useful for income splitting if someone earns much more or less than their spouse, but otherwise if your current income is $60,000+, you’re under age 40, and you save enough for retirement or have a company pension, you are extremely unlikely to end up in a lower tax bracket.

    Most of us should be in the 22% federal + 10% provincial tax bracket in today’s $. If you make more than that, consider squirreling money away in the Cayman Islands or something of that that sort (half-joking of course) … Second, if you move to a cheaper/lower taxed jurisdiction upon retirement, you will still be paying 15% tax minimum in Canada when withdrawing from your RRSP, but nothing on money moved out of a TFSA. Finally, because we have very little competition in the banking/insurance sector (let’s hope that changes eventually) the annuities you can buy in Canada are ripping off savers. Considering all these factors, put your first $5k in a TFSA every year and only the excess of that into your RRSP.

  30. JC on January 12, 2013 at 7:44 pm

    Disclaimer** Do NOT consider any of the following as advice in any way shape or form, as I am not communicating it as such: I’m a Financial Planner and I love how many people think RRSP’s are a big scam and how the “government takes my money!” As stated in the article, you got a tax refund up front, and don’t have to pay back the money until you withdraw… potentially many years later… you’re using the government’s money interest-free for potential profit. Most calculations will show and RRSP is usually ALWAYS better vs. non-registered. A smart move is to take the RRSP refund and pay down debt or contribute to a TFSA. I wouldn’t take a trip, buy a TV, orconsider it free money. Personally, through my employer, 100% of my stock contributions go directly RRSPs. a) I make 50% instantaneously through matching and b) If I have to withdraw it unexpectedly for any reason… well I’m just paying taxes back that I already owed anyway.

    Also, improved economist, I disagree. I think what you’re trying to say is that people with higher tax rates in retirement should contribute to TFSAs. Yes, that makes sense, but flat out saying ALL should contribute to the TFSA first is not necessarily a good recommendation.

  31. J B on March 17, 2015 at 2:10 pm

    Of course people who save are often higher income earners
    And frugality is just as important for them especially if they cannot read the future potential of their earning ability … So my question which is rarely covered in your wonderful site is where does an rrsp fit if
    You hope or plan to have a reasonably high income after 55,70 yes of age ?
    Is an rrsp still a good vehicle ? And how long ? What are alternatives or plan for rrsp/other in ones estate planning when they realize their frugal approach has left them expecting a higher income after 60?
    Can you help here ?

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