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Do RRSPs always reduce taxes?

Ask the professionals – June 2014

Written by Dave Lee
June 14, 2017

No, sometimes RRSPs can actually increase the tax you pay.

You receive a tax benefit based on your marginal tax rate when you make an RRSP contribution. When you withdraw money in retirement, you pay tax on your contribution plus their growth. This can work well if you are an employee who will be in a higher income tax bracket during your working years than during your retirement years.

But there are many people for whom this is not the case. Those who invest the proceeds of a sale of a business, the sale of property or an inheritance may find their income is higher in retirement. As a result, the tax they pay on their RRIF withdrawals is higher than what they saved when making the original contributions.

Three more ways RRSPs/RRIFs can cost you money: 1) Required withdrawals can cause your Old Age Security (OAS) pension to be clawed-back 2) You lose the dividend tax credit on Canadian source dividends 3) Business owners miss out on retirement strategies designed specifically for them.