I maxed TFSA. Can't your after-tax income be higher without RRSP?

Question

I already maxed my TFSA. I can't have and don't want kids. I live in ON. Service Canada website shows that if I start CPP at 70, I get $700/month. I think I got just two options — RRSP (contribution room today is $100K), non-registered account.

If I max RRSP, and withdraw RRIF starting no earlier than 72, my income at 72 will too high for GIS and will lower my OAS. When I'm 90 and look back, isn't it possible my after-tax income will be higher if I never used RRSP?

Answer 1

The question you have is: should you invest in RRSP's, or in a non-tax advantaged account?

There are a few downsides to RRSPs, and you've listed one of them. In general, they are:

• Compared to TFSA's, less flexibility [not applicable to you as you max your TFSA];
• Compared to RESP's, no government grant for children's college savings [not applicable to you with no children];
• If your income is higher in the future than today, you might receive income in a higher tax bracket than the deduction you get for contributing;
• If tax rates rise in the future, being taxed in the future may hit harder than the deduction today;
• The additional income received may reduce your OAS payments [as you've identified];
• Any income received is 're-characterized' as 'regular income', meaning that you (a) lose the beneficial 50% tax-free element of capital gains on liquidating assets to get a distribution; and (b) lose the dividend tax credit for dividends received during the period;
• You are unable to deduct investment costs associated with the RRSP, such as loan interest if you borrow funds to invest [this is risky in general, and I am not saying it is a good idea, but at least it is better to do outside of an RRSP account]

But let's look at the positives and see if they mean more to you in your case:

• The deduction from your taxable income today has a meaningful impact on the amount you can invest, probably magnifying the impact of your initial investment by 30%+! [ie: if you could afford to invest 10k / year, with a 3k tax savings assuming a marginal tax rate of 30%, you could invest 13k / year].
• The investment will also accrue earnings on a tax-deferred basis, so your growth rate also theoretically goes up by the same tax rate [let's still assume 30%]. Note: this impact is lessened if you hold long-term stocks and don't trade them, since you only pay taxes on dividends received / stocks actually sold.
• For most people, your income in retirement is lower than your income in your peak earning years, and therefore tax rate is likely lower as well.
• In some circumstances, you can take money out from your RRSP before retirement, deferring the increase in income. The most typical way is the Home Buyer Plan, which allows taxpayers who have never owned their house before to make a downpayment directly from their RRSP [some rules apply]. This allows you to maximize your available downpayment, effectively increasing your purchasing power in this potentially crucial time of life.
• Some other non-tax benefits like creditor protection; I believe RRSP accounts are typically protected in case of bankruptcy [I'm not positive on this one].
• Emotionally, saving in an RRSP makes it 'hands off' money, which encourages you to leave it until retirement; this may not be a big motivator if you are already maxing out your TFSA's.

Whether the benefits outweigh the costs will strictly depend on your personal circumstances.

Because the ultimate result depends on forecasted information, you may end up deciding incorrectly. Try running some numbers on various scenarios - what happens if you magnify your original investment by your tax rate today [turn 10k / year into 13k / year], accruing gains tax free until retirement, and then paying out tax in 30 years? [When I run these numbers, assuming you earn 3% annually pre-tax or [3%*.7=2.1%] post-tax, you end up with 18.6k after tax in 30 years outside of an RRSP, or 22k after tax in 30 years inside of an RRSP. What happens in other scenarios that better reflect your investment style [including tax characterization of income, such as dividends vs interest vs capital gains]?

Try running the numbers yourself and see what you come up with. If you have specific questions that fall out from that forecasting, post them here for additional guidance.