Are RSP Contributions Always the Right Answer? It Depends…

RSP contributions are a great way to save for your retirement, but the trick is to use them correctly. Kevin Gebert, MFA designate and financial advisor, weighs in with his opinion.

I have said many times that we have six seasons in Canada. Everyone should know the normal four, with tax season and RSP season being numbers five and six. From a financial planning perspective RSPs should be considered throughout the whole year rather than just the first 60 days of each calendar year. It would even be nice if RSP contributions were due after taxes were submitted, but I don’t see that happening anytime soon. Therefore, clients often ask me, as their financial planner, if they should buy RSPs to save tax for the previous tax year or even ‘top up’ contributions that have already been made through their monthly contributions.

RSP contributions are a great way to save for your retirement, but the trick is to use them correctly. In a perfect world you should get a bigger tax break upon contribution and pay less tax upon withdrawal, but this is not a perfect science. I would argue that increasing your net worth is the main focus and, therefore, crunching the numbers prior to RSP contributions is a valuable exercise each year.

Here are three common questions I am asked: My response is often ‘it depends’.

Should I contribute to my RSP or make an extra mortgage payment?
It depends... Both goals are important, but you need to look further into this to be able to make the correct decision. Saving for retirement and paying down non-deductable debt is important. Have you figured out the mortgage interest savings of an extra $10,000 principle pay-down versus a $10,000 RSP contribution for the 2012 tax year? These calculations include a number of variables (marginal tax rate this year and in the future, length of mortgage term, projected investment returns, projected mortgage rates, allowable extra mortgage payments, etc.), but a general comparison is valuable as a start. Another solution that many clients use is to make the RSP contribution and contribute the tax savings to their mortgage when they get their NOA back.

Should I contribute to my TFSA or my RSP?
It depends... Financial planning consists of making recommendations before and during retirement to save clients from the ‘claw-back’ zone and TFSAs are a great way to do this. If you know that you are going to make more money in the future it may be to your advantage to save your RSP contributions to a future tax year and contribute to a TFSA. If you are close to a projected claw-back then you have to see if making RSP contributions will give you a net benefit upon withdrawal in the future. If your income level is going to be low for the remainder of your working years foregoing RSP contributions and contributing the maximum yearly limit in your TFSA may be a good idea if you can afford it. If you are receiving government benefits reviewing any claw-back issues are important to do prior to a RSP contribution as a TFSA contribution may be better for you. Always consult your financial planner prior to making a decision.

Should I contribute to my RSP or pay down my other debt?
It depends... Most of the suggestions to this question are similar to the RSP vs. mortgage down-payment scenario because you are dealing with non-deductable debt (unless you have debt for an investment loan). Debt is a big problem in society and paying down debt is often the better decision even if it is a good psychological feeling. Unless you invest your RSP in a guaranteed product, you are dealing with an uncertain growth rate. You may have a line of credit but the majority of debt is from credit cards and we all know how high those rates are. Ask your financial planner if it makes sense to hold off on RSP contributions and pay off additional debt. But again it depends.

We have a limitless amount of money to invest in my RSPs with no debt?
Wouldn’t we all like to be in this situation?

Kevin L. Gebert is a financial planner and MFA designation holder based in Surrey, BC.

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