Kids cost a bundle. Read this.

  By Guest Blogger Sinan Terzioglu

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Despite their powerful advantages, Registered Retirement Savings Plans (RRSPs) remain one of the most underutilized and misunderstood financial tools among Canadians. Every year, millions miss opportunities to grow their savings and reduce their tax bills simply because they don’t fully grasp how RRSPs work or mistakenly believe these accounts aren’t relevant to their situation. Persistent misconceptions and lack of awareness mean many are missing out on the significant long-term benefits RRSPs provide.

I was recently asked:

I’m in my late 30’s and have built up a significant RRSP balance, while consistently maximizing my TFSA contributions each year. I earn over $250,000 annually, and I plan to continue working until age 60. Recently, I’ve started to question whether it still makes sense to contribute to my RRSP. Given the potential growth of the account over the next 20+ years, I’m concerned about the substantial taxes I’ll face when I begin withdrawing funds in retirement especially since I expect to remain in the highest tax bracket for a significant portion of that time. It seems like I’m simply deferring taxes and will be paying much more later rather than achieving meaningful long-term tax savings in my later years. 
 
Because of this, I’m considering whether it might be more tax-efficient long term to redirect future savings into a non-registered investment account. This could help reduce my overall tax burden in retirement since RRSP withdrawals are fully taxable and having non-registered investments would provide greater control over how and when I access my funds. Do you think it still makes sense for someone in my situation to keep contributing to an RRSP?  

RRSPs offer their greatest benefit when contributions are made during high-income years and withdrawals occur in lower tax brackets during retirement. This creates a powerful tax arbitrage, allowing individuals to defer tax and benefit from long-term compounding. Even if you anticipate being in the same or highest tax bracket in retirement, RRSP contributions can still be advantageous. That’s because, when tax rates remain consistent at both contribution and withdrawal, the net result is equivalent to earning a tax-free rate of return on the original after-tax investment.

To illustrate this, suppose you contribute $10,000 to your RRSP while in the 53.53% marginal tax bracket. You’d receive a tax-refund of $5,353, which you could reinvest separately. After one year, if your RRSP earns a 6% return, it would grow to $10,600.

Now, let’s say you withdraw the full $10,600 from your RRSP after one year while still in the 53.53% marginal tax bracket. You’d pay $5,674 in tax on that withdrawal, leaving you with $4,926 in hand. At first glance, that might seem like a loss compared to your original contribution. However, it’s important to factor in the $5,353 tax refund you received when you made the initial contribution.

Your net cash flow is:

• Initial outlay: $10,000
• Tax refund: $5,353
• After-tax withdrawal: $4,926
• Net result: +$279, which represents a 6% return on the $4,647 net contribution after accounting for the tax refund.

The RRSP enables the full 6% return to be tax-free, even when the contribution and withdrawal are taxed at the same rate. This example underscores the power of tax-free growth within an RRSP, demonstrating how it can be an effective strategy for building long-term wealth even if your tax bracket remains unchanged in retirement.

Here’s a comparison of how a $10,000 pre-tax RRSP contribution stacks up against investing the equivalent after-tax amount in a non-registered account over 25 years, assuming both earn a 6% annual return:

Click to enlarge

The RRSP ends up with a higher after-tax value because investment income within the plan grows tax-free and compounds over 25 years even if withdrawals are taxed at the same rate as the original contribution. In this example, we assumed no dividends or interest were earned in the non-registered account. If there were, the RRSP’s advantage would be even greater, as those earnings would be subject to annual taxation outside the RRSP, reducing overall growth.

Beyond the advantages RRSPs provide individuals, Spousal RRSPs offer strategic tax planning opportunities for couples especially when one partner earns significantly more. Contributions made by the higher-income spouse to a Spousal RRSP generate an immediate tax deduction, while withdrawals—after a three-year holding period—can be taxed in the lower-income spouse’s hands, reducing the couple’s overall tax burden. Additionally, once RRSPs are converted to RRIFs after age 65, withdrawals qualify as eligible pension income, allowing couples to split the income and further optimize household tax efficiency.

RRSPs and RRIFs also support efficient estate planning. Upon death, assets can roll over tax-free to a surviving spouse, deferring taxes and preserving retirement savings. Additionally, naming a beneficiary such as an adult child enables RRSP assets to bypass the estate, avoiding probate tax and streamlining the transfer process.

In summary, between the upfront tax deductions, tax-free compounding of investment growth, and strategic advantages like spousal contributions and pension income splitting after age 65, RRSPs provide significant long-term advantages in most financial situations even for those that don’t anticipate being in a lower tax bracket during retirement. When you consider their ability to shelter highly taxed interest income and allow for efficient portfolio construction, RRSPs stand out as one of the most powerful and versatile savings accounts available and you’ll be hard-pressed to find a better way for building long-term retirement wealth.

Sinan Terzioglu, CFA, CIM, is a financial advisor with Turner Investments, Private Client Group, Raymond James Ltd.  He served as vice-president of RBC Capital markets in New York City and VP with Credit Suisse in Toronto.

Source: https://www.greaterfool.ca/2025/09/03/kids-cost-a-bundle-read-this/