The Truth About Retirement Accounts

Retirement Account – Taxation

Many folks should use tax deferred programs such as the RRSP or 401(k). Contributions made into a retirement account is tax-deductible and can grow tax-free in the account. When it is eventually withdrawn and taxed the plan holder will likely be in a lower income tax bracket. I would personally try to keep investments that produce mostly capital gains or eligible Canadian dividends out of my RRSP. But that’s just my personal preference for tax efficiency. The picture in this link here definitely says otherwise.

Most people expect to be in a lower tax bracket when they retire so contributing money into an RRSP to defer taxation to a later date when their tax rate is lower makes sense. But some experts say it’s probably not a good idea to use RRSPs if we expect to retire in either the same or a higher tax bracket as we are in now. However, there might be another way to look at it. 😀


What if it’s still smarter to contribute to an RRSP today even if our marginal tax rate will be higher in retirement? When we make a tax deductible contribution to our RRSP today, the immediate tax relief we get is based on our marginal tax rate. So if our marginal tax rate is 30%, then we would receive $300 by contributing $1,000 to a registered retirement account. But when we withdraw money from this RRSP (or RRIF,) the money we take out is only taxed at our average tax rate, not the marginal tax rate. For example, if we request 12 monthly withdrawals a year from our retirement account then these payments would be taxed similarly to receiving work income from a job where each payment reflects our average income tax rate.

This is due to our progressive income tax system. In Ontario for example, the first $45K of income is taxed at roughly 21%, then the next $28K of income is taxed at 30%, and so on. So if we make $100,000, then we actually pay about $26,000 of income tax, which makes our average tax rate 26%, even though our marginal tax rate would be 38%.

So I’m going to continue maxing out my RRSP contributions each year even if there’s a chance my income will be higher in my 60s and 70s than it is now. 🙂

Random Useless Fact:

Some people on the internet can’t figure out how many girls are in this picture.



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03/21/2016 8:07 am

Why is this the first time I’m comprehending this!?!

sherry @ save. spend. splurge.
03/21/2016 9:58 am

1. More money is more money is more money.

If I can pay more taxes in retirement than now, I’d be thrilled. I paid over $50K in taxes last year and if I can pay MORE than that, it means I am killin’ my income. I’d be happy to pay it especially with passive income.

2. 2 girls obviously.

the truth
the truth
03/21/2016 12:30 pm

wow, this is why people shouldn’t believe everything they read on financial blog because this is just flat out incorrect. I really hope you take this down because it would be shameful if someone acted on this blatantly false info. Please recheck your facts.

03/21/2016 3:43 pm
Reply to  the truth

Amateurs are why the Internet is a dangerous place. It’s also why financial literacy is on the decline.

The median individual income is ~$32,000 gross, $27,000 net; 13-15% average tax rate, 20-25% marginal tax rate. Average saving rate is ~3.5% ($950/yr).

RRSP contributions do NOT create a positive net effect for at least half the population (unless they retire into poverty).

Seek out a real RRSP vs TFSA calculator and you will see no net difference via tax between contributing to an RRSP or a TFSA. So keep it simple and use the TFSA.

RRSPs make sense for only the highest 10% of earners.

03/21/2016 3:47 pm
Reply to  Anon

RRSP vs TFSA calculator:

You’ll notice TFSA wins for the majority of realistic inputs.

03/22/2016 4:29 am

If you believe that you’ll save enough to earn as much in retirement as you do today, then you’re better off to pay the taxes today. Given that the likelihood of taxes to rise, you should pay the lower rate today. Just a thought to pass along.

Royalty R
Royalty R
03/23/2016 6:52 am

Tax may (will?) rise in the future but tax brackets also increase based on inflation.

RRSP > TFSA for those folks whose retirement income will be lower than their current income.
TFSA > RRSP for those folks whose retirement income will be higher than their current income.

Me, I’d max both of those 🙂

New Book: The Moolala Guide to Rockin` Your RRSP | Stumbling Through My Thirties
04/03/2016 5:24 pm

[…] you are deferring your taxes, but there are many reasons why you should contribute to an RSP even if there is a chance your income could be higher in your 60s. For the coworkers who haven`t started, I`ve offered advice, I`ve offered help and given them tips, […]