What RRSPs can — and cannot — do

How good is an RRSP as a way to save money? It’s very good.

CREDITOR PROOF

In general, if you don’t pay your debts, creditors may be able to recover what you owe from your assets.

However, Saskatchewan legislation fully protects savings in RRSPs from creditors.

PROBATE PROOF

You can make your RRSP probate proof. When you name your spouse as beneficiary of your RRSP, your RRSP bypasses your will upon death. The RRSP can normally be paid out to your spouse as the named beneficiary with only a death certificate and a letter of direction needed. By avoiding the court fees and legal expenses involved in proving the validity of your will, you save about two per cent of the RRSP value.

If you have no spouse, it is normally better not to designate a non-spouse beneficiary. Let the estate pay the probate costs, especially when you want your executor to have access to RRSP cash to pay income tax. Raise the RRSP beneficiary question with your lawyer or financial adviser the next time you are reviewing your estate plan.

NOT PROCRASTINATION PROOF

Contributions to the Canada Pension Plan and a company pension plan are mandatory. But RRSP contributions are totally voluntary. That is why too many Canadians have huge amounts of unused RRSP contribution room.

Every February your financial adviser can remind you to make lump sum RRSP contributions. Alternatively you can contribute automatically through monthly debits from your bank account. But it’s too easy to do nothing.

To really force yourself to save, you could get a loan to make a lump-sum catch-up contribution and use the tax refund to pay off some of that loan. Then, pay off the rest of the RRSP loan over the following year.

Even though non-deductible RRSP loan interest is expensive, you force yourself to build up your retirement nest egg.

NOT TAX PROOF

You only defer tax. When you contribute to an RRSP, you claim a tax deduction. Years later, in retirement, you will have to pay tax on all capital contributions and accumulated investment growth you withdraw.

When you withdraw accumulated investment growth from your RRSP, you will pay tax on the full amount of your capital gains and you won’t get the benefit of the dividend tax credit. RRSP growth is not tax proof.

Where you can really benefit is by taking withdrawals when you are in a lower tax bracket than when you made your contributions. If you receive incometested Canada Child Benefits, you could have an effective tax bracket of over 50 per cent.

In retirement, you might find yourself in a tax bracket of 25 or 26 per cent. The bracket shift from before to after retirement is the best way to benefit tax-wise from your RRSP.

NOT PENALTY PROOF

If you contribute too much to your RRSP, you will have to pay a penalty on your excess contributions. The harsh penalty of one per cent per month, or 12 per cent per year, can be stopped by withdrawing your excess as soon as you discover the problem.

NOT ALWAYS LONGEVITY PROOF

Upon retirement, most Canadians convert their RRSPs to RRIFs rather than to RRSP annuities. With a RRIF, you can outlive your savings.

To make your RRSP savings last for as long as you live, consider using some to buy an RRSP annuity.

Alternatively, you could dip deeper into your RRSP savings sooner in order to defer starting, and thereby enhance, your Old Age Security and Canada Pension Plan benefits, which are fully indexed and guaranteed to last as long as you live. Terry McBride, a member of Advocis, works with Raymond James Ltd. The views of the author do not necessarily reflect those of Raymond James Ltd. Information is from sources believed reliable but cannot be guaranteed. This is provided for information only. We recommend that clients seek independent advice from a professional adviser on tax-related matters. Securities offered through Raymond James Ltd., member of the Canadian Investor Protection Fund. Insurance services offered through Raymond James Financial Planning Ltd., not a member of the Canadian Investor Protection Fund.