When maxing out your RRSP contributions is the wrong choice

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RRSP stands for Registered Retirement Savings Plan. It is the self-directed retirement savings plan in Canada. All citizens can contribute up to 18% of their gross income each year, to a maximum income of $100,000 edited: $127,611. Therefore, your gross income that you contribute to your RRSP is not taxed. Instead, it will be taxed when you withdraw from the account in your retirement. Therefore, experts generally suggest

you should not contribute to your RRSP if your income is below $50,000 per year

Especially if you’re young and will likely earn more in the future, at which time those tax deductions will benefit you considerably more than they will in your early 20’s. If make less than $50K but you’re concerned about missing out on the “magic of compounding” (I hate that phrase), then you really should

max out your TFSA in full before you drop a cent into your RRSP

If your TFSA is already maxed out, start a second savings account and begin accumulating the $5,000 for next year’s contribution. Drop it in on January 1st of the New Year and begin again. If this is too easy then you’re probably getting close to an income that would justify RRSP contributions, but if you’re still far from the $50K mark and you expect to reach that milestone in your working lifetime, don’t do it. If you are just obsessed with the RRSP vehicle and want to use it even if it’s not to your advantage then go ahead and

put money into your RRSP but don’t claim the deduction — save it for future years

In 2010, I dropped $2,500 into my RRSP and I still haven’t claimed the tax benefit for it. Why? I haven’t needed it yet. In both 2010 and 2011, my income was below $50,000. Furthermore, I had tens of thousands of tuition deductions I had yet to use up. Even now I’m confident that unused tuition deductions, charitable contributions, and student loan interest credits, will keep me from claiming that $2,500 RRSP contribution for another year. Additionally, my employer pension counts towards my RRSP contributions. If I was contributing regularly on my own, I’d probably be careless enough to over-contribute.

Now that I’m headed towards higher earnings and shaking free of my student debt, one of my primary financial focal points will be minimizing my taxes. I’m not contributing to my RRSP (on top of my employer contribution) until its in my best interest tax-wise to do so.



About Author

Student debt killer, super saver, and stock market addict. BSc. in Chemistry from the University of Alberta, MBA in Finance from the University of Calgary. CEO x 2 and MOM x 1. Currently residing in Calgary, Alberta, Canada, but hooked on travelling.


  1. This was really interesting to learn. Since I am not a Canadian citizen I had/have no idea how your tax code works. I find it really interesting you can carry these credits to future years. Is there a time limit for you to carry forward these credits or can you pretty much do it indefinitely? Secondly are you just going to direct money that you would have saved towards a taxable investment account?

    • There’s no time limit — as long as you continue to file an income tax return your unused RRSP contribution room will be carried forward. You can only contribute to an RRSP until you are 71 (I think) though.

      I max out my TFSA (Tax-free savings account) with money I don’t put into my RRSP, then whatever’s left I put into unregistered taxable accounts. This way if you’re in a fairly low tax bracket (ie. below $50K as experts suggest), you won’t be taxed on what you earn in these taxable accounts anyway.

  2. John S @ Frugal Rules on

    That was interesting to read as I really don’t know how the Canadian tax system works. That’s great you can take those credits into the future. Is there a certain time you have to use that up by, or is it forever?

  3. Thank you for writing this! I will clear 50K this year… but it still doesn’t make sense for me to contribute to an RRSP yet! Given the tax implications, etc, as a young person, I am much better off to direct my dollar to other forms of savings, such as paying off my mortgage and car and filling up my TFSA. I contribute to my RRSPs to the extent necessary to maximize my employer’s contribution.

    • Agreed! I’m finally over the $50K mark too but because of my other tax credits for school etc. it doesn’t make sense for me to make my own RRSP contributions yet.

  4. Interesting point. My company matches my RRSP contributions up to $50 a month, so when my raise kicks in I’ll start contributing the maximum I can get matched. Other than that, I’ll try not to save too much into my RRSP until some other goals of mine are taken care of.

  5. Totally Agree. Across Canada it can vary slightly based on how the provincial income tax laws are set up, but overall $50K is a good ball park. I think a big part of the decision just comes down what your future tax bracket will look like compared to now, which admittedly isn’t always clear for some people. I also like your idea of contributing to an RRSP now and claiming the deduction in future years for when you’re at the 36% tax bracket or higher. We’re still racing to see who gets to $100K first right 😛

    • haha we are so still racing to see who gets to $100K first 😉

      I feel like my future tax bracket will eventually be the highest… I hope. It’s my goal, anyway. Assuming I continue to work full-time and don’t do a major career overhaul 15 or 20 years in, there’s no reason why it shouldn’t be attainable — though the thought of paying 36% income tax is super depressing.

  6. Great post. Quick question though, where is the $100,000 limit coming from? I thought the 2012 maximum contribution was $22,970. Does the $100,000 pose a limit on catching up on unused contribution room?

  7. forfundssake on

    Great post on this Bridget. It’s similar to what I tell my friends when they’re confused about TFSA vs. RRSP. One factor I point out though is to check with the hr where they work and see if they match rrsp contributions. I’ve found majority of them don’t even know what the company they work for offers. If they’ll match your contributions, take advantage of it 100%. When your rewarded with money for contributing money, that’s a good deal!