Rethinking the RRSP's Benefits

Abstract

Canada’ Registered Retirement Savings Plan (RRSP) is a tax-deferred account intended to help workers save for retirement. It has existed for so many decades that professionals feel certain they know everything there is to know about the account. Its rules and mechanics are well known not only by professionals but also by the public.This article presents an analysis of the RRSP’s net benefit that contradicts the received wisdom. It provides the math proof and conceptual model supporting a claim that the RRSP's net benefit comes from five separate and independent factors that add together. 1. Profits are never taxed. Not while in the account and not on withdrawal. 2. A bonus (or penalty) comes from lower (or higher) tax rates on withdrawal. Both are possibilities. 3. The loss (gain) of benefits from other income-tested programs in retirement (when young). 4. A growing penalty from any delay in claiming the contribution’s tax deduction. 5. Profits earned by the withdrawal tax not paid on Home Buyer’s Plan (HBP) draws. In contrast, the commonly believed benefits and conceptual model are shown to be contradictory and fail to explain outcomes.