Ask most people what an RRSP deduction does and they’ll say it saves them tax. It doesn’t. It moves the tax. You borrowed from the CRA, and nobody sat you down and read out the terms.
Here’s the bit that catches people.
You deduct at the rate you’re in when the money goes in. You pay at the rate you’re in when it comes out. Two different numbers, set decades apart, by two different governments.
We put the arithmetic on a slide a while back because clients kept asking. Ten thousand a year for thirty-five years, growing at seven and a half percent. That gets you to just over a million and a half. Take five percent a year and leave the capital alone and you’ve got roughly seventy-seven thousand of income.
Now pick the bracket you contributed in.
At fifteen percent you deferred about fifty-two thousand of tax across those thirty-five years. At BC’s top combined rate you deferred a hundred and eighty-seven thousand.
Big gap. Here’s the part that isn’t.
At every bracket on that slide, handing it back takes four and a half years of retirement income. Not four and a half years at the bottom and twenty at the top. Four and a half, every rung.
Then you keep paying. Every year after that. And when you’re gone, whatever’s left in the RRIF gets added to income on the final return, so your estate pays too.
Why has nobody mentioned this
Picture building a house where the plumber never speaks to the electrician. The painter has never met the flooring guy. And not one of them has seen what the architect drew.
Every trade does good work. Every invoice is fair. You still end up with a house nobody would choose to live in.
That’s most people’s financial life, and nobody planned it that way.
The bank sold you the RRSP. Their job was the contribution. Your accountant claimed the deduction. Their job was this year’s return. Your advisor picked the funds inside it. Their job was the growth rate.
Three people, three jobs, all done properly. Nobody’s job was the withdrawal, because the withdrawal is thirty years away and it lands on somebody else’s desk.
That’s the gap. It’s also where most of the money goes.
The assumption everyone makes and nobody checks
Almost every retirement plan we’ve ever read is built on one sentence: your bracket will be lower in retirement.
Sometimes it is. If you’re drawing modestly and your income drops, the plan works exactly as sold.
But run the list of people we actually sit with. A physician with a corporation, a paid-off house, a rental, a RRIF that has to start paying whether they want it or not at seventy-one, CPP, OAS, and a spouse with their own accounts. Add it up and the “lower bracket” is doing a lot of quiet work in that plan.
And that’s before you ask the harder question, which is whether rates themselves stay where they are. We don’t know. Neither does anyone selling you a projection that assumes they do.
What we’d actually suggest
None of this makes an RRSP bad. It’s still the right answer for plenty of people, and if your bracket really will drop it does exactly what it says.
What it isn’t is automatic. It’s a bet on a future rate, and it’s worth knowing you’ve made one.
Three things worth pulling out this week.
Find your notice of assessment and look at the bracket you actually deducted at. Not the top rate you assume, the real one on the return.
Then look at what your RRSP is likely to be worth at seventy-one and multiply by the RRIF minimum for that age. That’s forced income arriving whether you spend it or not, and it stacks on top of everything else.
Then ask what else is landing in the same years. CPP, OAS, a pension, rent, a corporation you’re drawing from.
If those four numbers stacked together land you back in a bracket close to where you started, the deferral didn’t do what you thought. That’s worth finding out at fifty-five and not at seventy-two.
The part that’s harder to say
Retirement income is a cash-flow problem wearing a savings problem’s clothes. A big balance on a statement feels safe. What matters is the deposit that lands every month after tax, for as long as you’re here, and there’s no single account that does that job well on its own.
We’ve been doing the tax side of this since the early nineties and the coverage side since 2008. The reason we look at both on the same file is that the RRSP question can’t be answered from inside the RRSP. It needs the corporation, the pension, the property and the coverage on the same page, because that’s the return the CRA eventually reads.
When did someone last put all of yours on one page?