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The mantra’s been drilled into your head for years: save money in an RRSP. But, with the RRSP contribution deadline looming (March 1), it’s worth noting that an RRSP is not, in fact, always your best bet.
RRSPs’ logic works like this: Save when you’re making lots of cash, and paying lots of tax. Withdraw when you’re making less money and you’ll cough up less to the taxman. But some people are such fantastic savers (and investors), that by the time age 71 rolls around – when you’re forced to start removing money from your RRSP – your withdrawals might push you into the highest tax bracket anyhow (about 46 percent of your income). Plus, at that age, you might still be happily working away.
This isn’t a reason to ditch the RRSP altogether, but if you’re a savvy investor and have a lot of money to work with, consider putting some dough into a non-registered account. In that case, you can potentially collect dividends, which will be taxed at a lower rate than your employment income. (You could buy dividend-paying stocks in your RRSP, but you wouldn’t get any preferential tax treatment; you’ll just pay tax on the total amount when you withdraw.) Finally, if you’ve got high-interest credit card debt, pay it off first and you’ll essentially get an 18 percent return — a number you’re unlikely to match anywhere else.
An RRSP is a smart place to put your money, no doubt, but it’s not the holy grail. Your new mantra should be a simple one: Invest wisely.
Image courtesy of Dariousz.