The simple truth about RRSPs is that for lower-income Canadians they don’t make sense. First of all, they probably don’t have any excess money after paying the bills to even make a contribution. Recommending that these people borrow to invest in an RRSP is simply irresponsible. Even if they have the money, the tax refund at a lower income bracket for many of these people will be pennies on the dollar. There are also other problems lurking like the clawback of government low-income subsidies because of RRSP investment values.
Before we delve into the details, let me clear up one common misconception: RRSPs do not equal equities. RRSPs are registered plans that can hold many different things including equities (stocks or mutual funds that invest in stocks), bonds and GICs. An RRSP is therefore not “risky” by definition. It is if all you decide to put in it is equities, but not if you simply buy GICs in it. Don’t confuse RRSPs with the actual investment instruments they may contain.
Even if RRSPs make sense for a person, there are many alternatives: investing outside an RRSP, investing in real estate, investing in your own business, Tax-Free Savings Accounts (TFSAs), and possibly forming a corporation and leaving profits in at the low rate of tax and drawing dividends out after retirement.
But are any of these alternatives better than an RRSP?
The debate ...