A recent column in The Financial Post (See Were RRSPs a major mistake?, FP, Jan. 19, 2011) by John Newell, a Toronto retiree, makes an amusing rant against RRSPs. The author makes one good point: it doesn’t make much sense for Canadians with little or no income to contribute to a RRSP, especially with the availability of Tax-Free Savings Accounts (TFSAs). But the rest of the arguments are either far-fetched or just plain wrong:

RRSPs have contributed to the growing gulf between low-and high-income families, which is not healthy for a democracy that needs a growing middle class to thrive.

Why stop there? Why not blame RRSPs for global warming, the Russians scoring five quick goals in the World Juniors or the Olympic torches malfunctioning in the Vancouver Olympics?

That leaves Canadian equities, but why on earth would one want them in an RRSP or RIF when one cannot take advantage of dividend tax credits or low rates of capital gains taxation?

Simple. If you are in anything but the lowest tax bracket, a RRSP allows you to (a) defer tax and (b) shelter portfolio earnings from tax. If your RRSP can accommodate the Canadian stock portion of a portfolio, then that’s where it belongs. Why pay taxes on dividends when you have the option of not doing so?

Don’t forget governments can change the rules of RRSPs (or unit trusts) at any time, especially when they claim they will not.

The Government may also change the rules of TFSAs, dividend tax credits or capital gains taxes. We cannot make plans based on what rules the Government may or may not do in the future.

Canadians are smarter than the government and the financial services industry give us credit for. That is why only 55% of Canadians have RRSPs and why we use about 6%of our total contribution space, leaving more than $600-billion of space unused.

If RRSPs are not such a problem after all, why rant against them? It is a bit hard to sympathize with some Canadians bitterly complaining about having too much in their RRSPs. The solution is simple: stop complaining about your taxes, retire early and enjoy your savings.

This article has 40 comments

  1. I think there are some legitimate gripes about RRSP.

    It is indeed a tax shelter that favours the rich, and not very useful for the poor. (TFSA > RRSP)

    It is indeed complicated and have unpredictable results due to the uncertain tax rate when RRSP shall be withdrawn. Although governments have broken some pretty big promises, it would take a real asshole to start taxing a tax free account …

  2. While I’m glad that people are finally realizing the long term savings benefits of the TFSA (investing rather than parking the money in a high interest savings account at 2%), it should be used to complement your RRSP or pension, not completely replace them.

    RRSP’s are still a great savings vehicle, it still offers more contribution rooms than the TFSA, and I don’t think the math has been worked out to favour either TFSA or RRSP over the long term. I also agree with you on it being ok to hold dividend paying stocks in the tax sheltered account.

    Saying that RRSP’s are contributing to the growing gap between the wealthy and poor is just ridiculous.

  3. Some may rant. Some take a close look at their own situations and determine that RRSPs aren’t their best investment vehicles.
    In your last article (5 reasons why RRSPs aren’t so bad – or something like that) I asked about those w/ a defined benefit pension and RRSP contributions vs TFSA contributions. I appreciated your response that in our case it makes sense to look at maxing the TFSA before the RRSP. We certainly don’t “rant”, but we want to make sure our readers understand the pros and cons of any investment vehicle we consider.

  4. It is a terrible article, I agree, but to be fair, I think his main argument is: “Canadians would have been far better off with a TFSA program right from the beginning.”

    That’s a fair point, and almost certainly true. The RRSP program has always had serious defects, especially the lack of transparency to low-income earners of the consequences to other government programs on retirement, the restrictive 20% foreign content limitation that persisted until roughly 10 years ago, and the lack of employer-matching fund incentives like US 401k programs.

    On the other hand, I don’t think it’s a fair criticism to say that the RRSP program favours the rich. The maximum contribution limit cap is fairly clearly targeted towards the middle class. Due to the overall tax structure in Canada, it’s particularly difficult to achieve a reasonable income replacement level in retirement if you’re somewhere between upper middle class and lower high income and don’t have a public pension. RRSPs do however favour those with public pensions, because the formula for reducing one’s RRSP contribution room does not take into account the full, fair actuarial value of accrued public pension benefits.

    Most individual middle class investors without pensions should still be trying as best they can to max out their TFSA room *and* RRSP room. The recent trend towards demonizing RRSPs seems linked to: (1) people not having a good intuitive understanding of the power of compounded earnings in a sheltered vehicle versus a non-sheltered vehicle, and (2) the fact that we’re just on the tail end of a 10 year bull market in dividend stocks.

  5. What bugs me most about these columns is that they are mostly complaining that they are forced to pay tax on RRSP / RRIF withdrawals. I grant that there are some legitimate concerns, chief among them: whether RRIF withdrawal schedules are too aggressive but complaining about taxes on withdrawals gets zero sympathy from me.

    The money contributed to RRSPs are not taxed. All earnings within it are not taxed. These were huge advantages. Some took full advantage and are now complaining about being too successful and paying taxes. They should simply suck it up and pay their fair share. Their complaints are as grating as from someone who earns a hefty pay cheque and complains about their income taxes to the rest of us.

  6. the blunt bean counter

    The article is so ridiculous, I am not sure it was even worthy of posting. The TFSA was a political plum granted by the government during tough economic times. Whether the TFSA will be withdrawn or its popularity will cause it to stay or again be used as a political plum with a future increase in the contribution limit is unknown. The RRSP is based on the governments concern about Canadians having proper savings at retirement.

    As I have pointed out on my own blog in an example and as you have have discussed several times, high wage earners are at worst tax neutral (subject to inflation) and lower middle to upper middle class earners income tax rate on the refund they receive on their RRSP contribution is far higher then the income tax rate coming out of their RRIF’s (assuming they are married and can split their pension income and both spouses don’t have substantial RRSP’s). Yes for low income earners the RRSP provides little relief.

    RRSP’s and RRIF’s are getting way to much flack. Could the withdrawal rates be lowered or smoothed, yes; could there be a lower automatic tax rate on withdrawals, maybe; but in the end, RRSP’s seem to fit the need for Canadians retirement needs and the governments need to ensure that retirement planning and tax collection.

  7. @Slacker: Count me in the crowd that hopes TFSAs won’t be taxed. But I can see these accounts becoming too successful in the future.Consider a couple with $15,000 each in their TFSA accounts. Even if the money is kept in a savings account paying 1.5%, the government forgoes tax on $450 — worth about $150 to $200 for most families. The foregone taxes are increasing every year. The Government could at some point in future decide to tweak TFSA rules.

    @Echo, @SustainablePF: I totally agree that TFSAs and RRSPs should be complementary. I also agree that TFSAs might make a lot of sense for many situations as a place for retirement savings. But it’s annoying to hear from all these baby boomers complaining about RRSPs because they are paying too much tax now. Often their numbers just don’t make any sense. Here’s another from FP:


    @Viscount: I’m a bit puzzled by the spate of recent attacks on RRSPs. Typically, during RRSP season we see the opposite — columns that try to scare Canadians into saving inside a RRSP. At least that was understandable, considering financial institutions benefited if Canadians stuffed into their RRSPs at the expense of debt repayment. I’m not much for conspiracy theories but I wonder if financial institutions are trying to push TFSAs as most Canadians seem to be simply parking cash in these account.

  8. Christina norman

    I find it difficult to determine personally whether or not my RRSPs should hold my equities. Lets ignore TFSA for this example, assume it is maxed.

    Let’s say I have $100,000 in equities I purchase with cash. Over 15 years this goes up to $200,000. Outside of my RRSP I am paying tax on this as capital gains, so 50k of income distributed over 15 years and taxed at my marginal tax rate.

    In my RRSP this is untaxed until I withdraw it, at which point I will be fully taxed at my (presumedly lower) marginal tax rate.

    These comments deal only with the interest portion however, by putting the 100k in my RRSP in the first place I had an opportunity to defer tax on the 100k, and probably pay a lower tax rate when I withdraw the money.

    I find it difficult to quantify the benefits of the RRSP versus capital gains. Are there any calculators, formulas, or strategies for doing so beyond faith that tax deferral is good?

  9. Regarding that link you posted:


    That article is just bad journalism. I can’t understand why Chevreau just reprints every piece of crap that goes through his inbox – industry pr emails and garbage like that idiot who supposedly left Canada to avoid some taxes.

    RRSP is a tool – if it does the job for you, then use it. If not – don’t.

    And learn the rules – RRSP contributions defer tax – RRIF (or RRSP) withdrawals incur the deferred tax.

    In the article, Chevreau refers to RRIFs as a “tax grab”. Total nonsense.

    On another topic – I don’t think it’s likely that the TFSA rules will change. Most people just don’t save much and I think there will be a very small percentage of the population that will get a lot of tax benefit from it.

    Check in 5+ years and see what the TFSA contribution room utilization rate is – it will look similar to the RRSP rate which is fairly low.

  10. >>>>>
    I do not envy the poor sod sitting on a RRIF of $10-million.

    Yes, what a tragedy. My heart weeps for that guy.

    Yet another piece of garbage from the Post.

  11. bang on cc …. bang on

  12. Three (curt) points:

    1. Don’t like it. Don’t use it. Pay your tax now. Your life. Your choice.

    2. I am interested in seeing TFSA participation rates and average contributions. The issue may not be as simplistic as RRSPs are bad policy design as people are not contributing to anything. But that requires taking personal responsibility rather than blaming others.

    3. In the never ending quest to pump out content, this is what content providers are down to (this and watch out for a snow storm Canada- since, um, it snows every winter here)?

  13. Good article and comments. My partner and I are small business owners and sit firmly in the middle to upper income bracket. This may change if the business sells but we’ll cross that road when it comes (and you wont here us complaining about the income either). Because of choice to be business owners we dont have pensions waiting for us nor do we have private health insurance. Im glad articles like these and commenters point out those like us exist and provide some advice. BTW I dont have alot of sympathy for those who complain about thier private health care ins plans either…at leat they have them.

    Thanks guys!

  14. I agree that the complaints about RRSPs are mostly ridiculous, but I wonder if those who make these arguments are more clever than they appear. The number of people who wish they could pay less on RRSP withdrawals is large and keeping the discussion going might ultimately lead to the government changing the tax laws. With this goal in mind, I’m not sure it matters whether the arguments make any real sense.

  15. @CC: BTW I am confused about the dividend holdings though. I have read in many articles that it’s more tax effecient and beneficial to have these investments in non-registered vehicles but your article suggests this may not be the case. Can you clarify?

  16. @the blunt bean: I’m mystified at how much flak RRSPs are getting this year. Usually, it’s the opposite. I do wonder why!

    @Christina: That’s the subject of tomorrow’s post because this question comes up often. PH&N put out a report many years ago on this topic. It is available here:


    The report points out the numerical and behavioral advantages of saving within a RRSP for most Canadians. It also shows who should not save inside a RRSP.

    @Mike: I certainly hope TFSA withdrawals are not taxed. If I were to take a wild guess, I’d say that beyond a certain $ figure, the Government would want to include TFSA withdrawals in income-tested benefits such as OAS. They can then paint this as “taxing the rich”.

    @Chris, @Rob: That was a strange comment. If I had $10m in my RRIF, I won’t be complaining at all. I wonder why FP puts out this stream of nonsense.

  17. @CC: Was thinking about your statement above: “The foregone taxes are increasing every year.” This is true, but there’s more to the picture I think.

    I actually see the TFSA as tax revenue positive to the government in the near-term, and tax revenue negative in the long term. This works well for government efforts to balance the books by 2015 (2018, 2020, ???), but this is exactly what they DON’T need over the coming 20 years as they (we) deal with budget crunches from aging populations, few productive workers, healthcare, etc.

    A. Contributions (the “near-term”)
    TFSA: government gets their tax dollars today, as contributions are in after-tax dollars.
    RRSP: government gets their tax dollars tomorrow, as contributions are in before-tax dollars.
    Therefore, looking at contributions only, the government gets more revenue in the near-term as funds that would otherwise have been put into RRSP’s get put into TFSA’s instead. This actually gooses government tax revenues over the TFSA introductory years.

    B. Asset Gains (the “longer-term”)
    TFSA: government sees no tax from increases in portfolio value.
    RRSP: the government will tax as income increases in portfolio value.
    As asset gains become a larger component of TFSA portfolio values, and new contributions form a smaller portion of the total TFSA investment, then yes, the government starts to feel the tax pinch. Future government tax revenues from citizens aggregate RRSP and TFSA holdings are reduced.

    Overall then, yes, TFSA withdrawals could certainly come under government scrutiny as a source of tax revenue, as government tackles budget issues in the decades to come. I don’t believe they could ever touch the contribution amounts (as they have already been taxed on contribution), but asset gains could become fair game. Some similarity to the RESP, with an income-tested element to determine tax on withdrawal?

  18. @Thicken: Good points. I recall Air Farce making fun of the then new TFSAs with “as if we have any money to contribute!”.

    @Marie: If you have contribution room and if you see yourself paying approx. the same or less tax in retirement as in working, then a RRSP still makes sense for dividend stocks. The reason is that dividends still attract a tax of ~20%. This tax is paid every year whereas within a RRSP, the dividends can truly compound. I’ll looked at some models in the past that show the RRSP clearly comes out ahead. I’ll see if I have them around and perhaps make a post out of it.

    @Michael: That’s a very good point. The hue and cry around Income Trust taxation brought in pension splitting, so it’s not unprecedented either.

    @Ben:Agree. If every Canadian maxed out their RRSPs, current revenues would take a big hit. Likewise, if TFSAs are maxed out future revenues would be hit. Should that happen, the Government would look for ways to limit damage to its revenues. Hopefully, like Mike says, TFSA take up will be as sluggish as RRSPs are today.

  19. While TFSAs may technically be a better mechanism for lower income earners retirment potfolio, I think pushing these people to the TFSA instead of the RRSP is a major mistake. Regardless of the best intentions of investors, the problems with using the TFSA for retirement is that the money is just simply too easy to accees before retirement. You can take it out without penalty and the temptation will be there to use it for expenses, renos, car, house, etc. So if someone in their 30s indicates they plan to use the TFSA for retirement, I would be shocked if that easy to access money originaly placed in their TFSA was still there 35 years later.

  20. @CC: Thanks. If you do find the info for a future post that would be great. It’s helpful that you and other bloggers related to Moneysense are dedicated enough to answer some commenters questions directly…and user friendly.

    Can you provide a simple explanation for why those in the lowest income bracket are better off with TFSAs? A friend, who like many others is a hardworking, self-emloyed single mom, has sacrificed enough to buy a small home and help her teenage son through university but has been advised by her bank to keep using her thin cashflow to invest in her RRSPs which self admittedly are small in value. Would you and other commenters advise her to switch to max out a TFSA first? She will be staying in the lowest tax bracket barring a big lottery win (which I’d LOVE to see for her). Maybe you or other bloggers like Couch Potatoe (also very helpful) could do an article or two on 1) small business owners, and 2) those like my friend who are self employed but modestly so for the longterm? Too many financial articles focus on the those who are in the mainstream 9-5 jobs with or without pensions, etc.


  21. @CC: if you or someone knows of good article on the benefits of low income earners investing in TFSAs vs RRSPs I could pass onto my friend that would be great too.

  22. @Greg: You make a very valid point from a money management style point. My partner and I happen to be pretty disciplined but my friend I mentioned in my question to CC is not. Although she is getting better as she reality is setting in of her future. For some of us though the TFSAs could act as an emergency fund as well if the need to liquidate funds fast was needed.

  23. @Marie – I am posting an article tonight which will attempt to show different pros and cons of RRSP vs TFSA at different income levels.

  24. I’m trying to figure out if the tax deferral benefit of RRSP will trump the capital gain tax credit of the taxable account. Because I’ve read too many articles which said that “capital gain investment should be outside of RRSP because of the tax benefit”, but I’m not sure I agree ….

  25. I think as long as you have help when it comes time to start “collapsing” your RRSP then the RRSP will show its value. You can forget all these “which is best” discussions. The rules are so complicated that i believe if one is ever to consider a fee based advisor/planner it’s more important on the back end to minimize your taxes before you begin to remove your money.

    Using “flow through stocks” for example rather then just yanking cash out of an RRSP or RRIF to legally beat the taxman. How many of us D.I.Y. investors can really implement a correct strategy to do this or other tax saving tactics? It’s pretty easy to make yourself your own retirement fund or share choices and get a fairly decent return. But the goverment needs money like a shark needs food. So they want to get those taxes out of you one day, so complicated rules are there that will trip up all those except people with a greater understanding of how to plan the exit of your hard earned funds.

  26. @Greg: That’s an excellent point that I wish I had mentioned in my previous post on RRSP advantages. A big pot of money in a TFSA is a huge temptation. At least with a RRSP, the withholding tax and any further taxes owed are a deterrent to blow on a cruise or vacation.

    @Slacker: Check out this PH&N report that compares investing within a RRSP to investing in a taxable account. Even for all-equity holdings, RRSP is better for middle to high tax brackets.


    @Marie: If someone earns less than $40K per year and expects to stay in that bracket in the future, it will likely be better to save in a TFSA or even a registered account because they are already in a low tax bracket. They are not going to see much benefit from dropping a few tax brackets in retirement (because they already are in the lowest bracket). Also, RRSP/RRIF withdrawals will affect income-tested benefits such a GIS.

    Here are a couple of articles to pass on to your friend. I find the METR graph in the C. D. Howe study to be especially interesting. It clearly shows the massive advantage of TFSAs over RRSPs for those earning $25K to $40K.


    @Mike: Look forward to your post.

    @Paul N: Flow-throughs have some disadvantages. Despite the tax benefits, it is best to keep allocation to small-cap resource stocks a small percentage of a portfolio. Flow-throughs have done really well in the recent past but they are very risky assets.

  27. @CC & Mike: Thanks for the info. I think I will have to filter the info for my friend as she really is a neophyte but really really wanting to understand better. I will also look forward to the new article for my own info.

    @Slacker: I agree. It’s for the majority of us DIY’ers who are trying to keep it simple while balancing maximizing returns vs protecting capital. As I said to CC one day, it can seem like info overload with so many articles and experts giving thier opinion about all the variables which for most part we have little (or no) control over. Right now I cant say for sure my husband and I wont be in a higher tax bracket at retirement but maybe we will be. I can say owning a growing a business does give you more stomach for risk and a better understanding of future planning. I sent another friend of my mine who is in the middle income bracket an article on CPP changes coming and she said, “it doesnt matter without a pension we’re planning on working until 80 anyway!” She was kidding …sort of.

  28. There are advantages and disadvantages to all investment vehicles including the RRSPs. I am not solely relying on them, but I do think that they have their place and that they do offer some important benefits. Being able to compound pre-tax isn’t too shabby.

  29. Invest it nicely well said and nice informative blog.

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  33. One point not raised is about the refunds achieved as a result of RRSPs. By re-investing the refund into an RRSP, the following year you get a refund off of a refund.

    Let us assume a person’s salary is fixed and they contribute the same amount every year. It’s not that you just get $X refund from your taxes every year so that it’s a linear investment growth (baring no fluctions in returns), but you also get a $X refund off of the following year’s $X refund. So your total value grows exponentially rather than linear. I hope that made sense. :S That’s a pretty strong benefit – too bad it took me a while to make the connection. :/

    With a TFSA you can only save the same amount year after a year – a linear model – so the investment total does not balloon like a RRSP pool can.

  34. Christina Norman

    The PDF you linked was quite interesting.


    Unfortunately they didn’t publish all the math involved in reaching their conclusion. I have some critisism of their methodology:
    – They assume an income of 100k, and a retirement income maintained at 100k, the results may or may not be the same for those with a lower income, or those who accept a lower income in retirement (which I think most people accept)
    – Their methodology assumes contributing the full RRSP refund to an unsheltered portfolio with the same asset allocation. It also assumes after tax income above 40k/year is contributed to an unregistered portfolio. The comparisons are thus not really registered versus non-registered, it’s more registered + non registered versus purely non-registered.
    – The methodology also assumes for those contributing to RRSPs that they keep the same asset allocation in their RRSP and their non-registered account, which really doesn’t make any sense, particularly in the 40% bond 60% equities split example where you’d think all your bonds would be in your RRSP.

    I found this document valuable, but really what I’d like to see is the actual mathematical process they used to make these calculations, so I could update it with my own numbers and do my own analysis.

  35. @Christina: Good points. It just confirms my belief that there are no one size fits all answers and we all need to educate ourselves and based on that and our own number crunching do what works for us.

    I love to see others questioning information and numbers being presented. Not as a dispersion to the authors but as a reminder to be our own expert and not just accept the word of others…even the ‘gurus’.


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  38. @Christina: Agreed. I feel the report makes assumptions that don’t favour RRSPs and still the RRSPs come out on top. Like you point out, it would have been better if the refunds were added back to the RRSP or contributions to a taxable account adjusted for taxes.

    But I think the report’s conclusions will be true for anyone paying 40% or more in taxes. For an Ontario resident, income levels over $78K are in that tax bracket.

    It is a good suggestion that everyone should construct their own models. I’ll see what I can come up with in Excel.

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  40. If you withdraw the RRSP in a single year, you will be taxed accordingly. So, if you make $30,000 a year and you’ve saved $250,000, you will be taxed for that year $280,000. You will completely lose, and if you die, the estate will have no choice but to withdraw on the final return.