The common financial belief is that you will be in a lower tax bracket in retirement and therefore saving within an RSP structure makes the most sense. I however believe that in many, actually most, situations this will not be the case at all.
Firstly, why on earth would you want to be in a lower tax bracket in retirement? That implies that your financial plan is to be poor in my opinion. Your goal should be to be in the highest tax bracket and pay the least amount of taxes. Your goal should be to be wealthy with a high income.
Secondly, what indications are you seeing that the government will actually lower taxes in the future?
- Currently high debt levels
- Aging population
- Economic sustainability of the oil industry
Thirdly, there is something called “tax bracket creep”. This is when, because of inflation, you require more money than before to live in the exact same manner as the previous year. So fast forward that to 10 or 20 years of retirement and you have to withdraw more money just to afford the same lifestyle. And as a result, your income will be higher, forcing you up another tax bracket and increasing your tax bill. Retirees often have another issue. If one spouse passes, their registered plans rollover to them tax free but now they must take out more money, increasing their taxes, as well as the likely possibility of claw backs of government benefits such as OAS or GST.
And last but not least, have you ever had to withdraw money from your RSP before retirement? Or known someone who has had to withdraw money from their RSP? They end up taking that money out at a much higher tax bracket then when the money was first deposited. That means that the tax refund they got on the contribution was much less than the tax they have to pay when they withdrew the funds.
Hey, I am not saying don’t save for retirement. I am just saying that unless you are in one of the top marginal tax rates, or have a company matching program, take a closer look at your personal circumstances to make sure RSP Contributions are in your best interest.
You need a better built plan that reduces taxes over your lifetime.