Dale Jackson

Personal Finance Columnist, Payback Time

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With the February 29 Registered Retirement Savings Plan (RRSP) contribution deadline looming, a new poll finds 61 per cent of Canadians know more about their favourite TV show than their pension plans.

The poll, commissioned by the Financial Services Regulatory Authority of Ontario (FSRA), also finds 91 of respondents agree more should be done to educate people about pensions.  

You don’t need a formal poll to conclude there are plenty of myths and misunderstandings surrounding RRSPs. Here are 6 of the most basic ones that could be hindering your road to retirement.

1. RRSPs are retirement investments

No, they are not investments at all. RRSPs are federal government-sponsored accounts that allow taxpayers to deduct contributions from their taxable income. The bigger the contribution, the bigger the deduction.

RRSPs are administered through private financial institutions that usually provide investment options. You can invest within your RRSP account whenever you want in just about anything, such as stocks, bonds, mutual funds or exchange traded funds (ETFs).

It’s important to note that some financial institutions only offer mutual funds, which often have high annual fees. Be sure to ask about all fees.

2. RRSPs provide a tax exemption

Wrong. Tax exemptions are forever. RRSPs provide a deferral, or shelter, from taxation until funds are withdrawn; ideally in retirement when you are in a lower tax bracket.

The tax deferral provided by RRSPs allow investments to grow tax free until retirement - provided your refunds are reinvested in the RRSP. The refund is just Ottawa returning part of what you already paid during the year through payroll deductions from your employer.

3. February 29 is the RRSP contribution deadline

Sort of. Midnight February 29 is the deadline to contribute if you want to deduct any unclaimed contributions from your 2023 taxable income. You can contribute any time. 

Tax savings can be maximized by deducting larger amounts in high-income years when you would normally be taxed at a high marginal rate.

4. You should contribute as much as possible

The RRSP contribution limit for 2024 is 18 per cent of the income you are reporting on your 2023 tax return to a maximum of $31,560. Unused allowable RRSP contribution space can be carried forward to future years.

However, maxing out your allowable RRSP space could be a costly mistake for those with plenty of time before retirement. Even if you don’t contribute the maximum allowable amount, the investments in an RRSP can grow too large and push withdrawals to a higher marginal tax rate. 

On top of that, Ottawa will eventually force you to make minimum withdrawals. If the amount is too high you could face Old Age Security (OAS) benefit clawbacks as well.

5. You should contribute something to your RRSP

Not always. There are times when your dollars would be better spent elsewhere. 

With borrowing rates now at a three-decade high, there are no RRSP investments that could guarantee returns even close to the double-digit interest rates on consumer and student loans, lines of credit, or credit card balances - even after you factor in the tax savings. If you’re one of the many Canadians struggling with a high level of debt, pay it down. 

If your debt is under control but your income and marginal tax rate are low, a better option could be investing in a Tax-Free Savings Account(TFSA), which can not be deducted from income but is not taxed when it is withdrawn. 

6. You can not withdraw from your RRSP until you retire

Not true. It might make sense to withdraw from your RRSP in years when your income is severely reduced and you are being taxed at a low marginal rate anyway. 

Withdrawals before 65 years of age are subject to a withholding tax at the source but any excess amount will be returned when you file that year’s tax return.

Early withdrawals can also be made with no tax consequences for first-time home purchases or continuing education provided they are returned within a specific period of time. 

Forum Research conducted the online poll between December 7 – 14, 2023 with a sample size of 1,000 Ontario residents 18 years or older.