This pretty much goes against all conventional thinking especially at this time of the year, but there are times when investing in your RRSP might not be the best idea.
The main reason many of us invest in our RRSPs to begin with is for the tax refund, who doesn’t like getting a cheque after filing their taxes? Of course, if we’re getting a refund all that means is that we gave the government an interest free loan.
Generally speaking, investing in your RRSP is always a good idea, but on occasion, it’s okay to avoid your RRSP.
You have debt issues
This is pretty straightforward, if you have some high interest debt owing e.g. credit card debt, then don’t even think about investing in your RRSP. I know what you’re thinking, you want that refund that’s why you invest in your RRSP. I’m well aware of what you plan on doing with that refund, you’re going to spend it. Under no circumstances should you be investing in your RRSP if you have debt issues.
You’re expecting a higher income in the future
This is an old argument; In Canada, we are taxed on a marginal basis so some of us would avoid making RRSP contributions until we reached a higher tax bracket. The logic was the RRSP contributions made later would drop us back to a lower bracket. I certainly understand why this sounds appealing but what many of us forget is that we can carry our RRSP contributions forward.
If your income is low
Everyone in Canada is allowed a basic personal amount of $11,388 as stated on line 300 of our income tax return. If we’re making less than that amount there’s really no point in making an RRSP contribution unless we plan on carrying that forward.
When other investments take priority
Investing in our child’s RESP guarantees a return of 20% (up to $500) yearly from the Canadian Education Savings Grant so it’s no surprise some parents decide to make this a priority over their RRSP. Investing in our TFSA may not give us a tax break, but any capital gains on our investments are completely tax free which is very appealing especially if time is on our side.
You have a defined benefit pension
Pensions are becoming increasingly rare so if you have a DB pension through your employer, consider yourself lucky. Since DB pensions offer a guaranteed payout upon retirement you won’t need to worry about your RRSP savings as much. Of course, it’s still important but you could easily concentrate on other investments. That being said, no pension plan is ever 100% safe (well maybe government pensions are safe) so you should always have some other form of savings.
Your retirement income will be higher than your current income
Our RRSP account is meant to be a tax deferral, the theory is once we retire we’ll be making a lower income which makes this account appealing for the majority of us. In some situations we may expect our retirement income to be higher than our current income, if that’s the case then it’s probably best to skip making any RRSP contributions.
Another reason to avoid your RRSP is if you plan on investing in your TFSA instead. That being said, it’s only good if you know how to invest and you’re disciplined enough to not withdraw any money from there when the rough times eventually come.