Are RRSPs Really the Retirement Solution We’ve Been Promised?

Gone are the days of working for a good company, retiring at 65, and collecting a guaranteed pension for life. Employer pensions have largely disappeared, replaced by RRSPs and group savings plans built on the assumption that employees will fund their own retirements - with a little encouragement in the form of employer matching.

Most of us have been given the same blanket advice for decades: “Save for retirement in an RRSP.”

But is that actually the best strategy?

A Cautionary Tale

Last week, a news story made the rounds online that stopped a lot of people in their tracks.

In short, a retired couple passed away within 11 months of each other. When the first spouse died, their RRSPs rolled into the surviving spouse’s RRSP, tax-free - just as expected.

But when the second spouse passed, their children were shocked to learn that the majority of their parents’ lifetime savings would go straight to the CRA.

Of the couple’s combined $715,000 in savings, over $669,000 - roughly 94% was owed in income tax and capital gains tax, including on their cottage, despite having designated it as a primary residence years earlier.

You can read the full story [here].

Tax Savings… Or Is It?

This couple was the picture of the responsible middle class.

They worked hard.
They saved diligently into RRSPs.
They took advantage of tax deductions.
They planned for their children to inherit whatever they didn’t use in retirement.

So what went wrong?

What many people don’t realize is that RRSPs don’t eliminate tax - they defer it.

Yes, contributions reduce your taxable income today. But withdrawals are taxed as income later, and after the investments have (hopefully) grown.

When the first spouse dies, RRSPs can roll into the surviving spouse’s account tax-free. However, when the second spouse passes, the full RRSP balance is included as income on their final tax return, often pushing them into the highest marginal tax bracket.

Will You Really Be in a Lower Tax Bracket?

The entire premise of the RRSP rests on one assumption: that you’ll be in a lower tax bracket in retirement.

But is that actually true?

Consider this:

• Do you really want to live on less in retirement than you earn now?

• Tax rates today are known, but tax laws change constantly. Is it wise to gamble on rates staying the same or going down?

• Inflation and rising living costs mean you’ll need more dollars just to maintain your lifestyle.

I don’t hate RRSPs, but I strongly disagree with how they’re typically sold.

Many advisors illustrate the “tax advantage” by comparing RRSP contributions to non-registered investing, assuming RRSP contributions are made with pre-tax dollars. But most people contribute after receiving their pay - using after-tax dollars - and later receive a tax refund.

And how many people actually reinvest that refund instead of spending it?

When RRSPs Do Make Sense

RRSPs aren’t inherently bad. They’re just not a one-size-fits-all solution.

They can make sense if:

• You’re in a very high tax bracket now and are confident you’ll be in a much lower one later

• You’ve maxed out your TFSA and need a tax deduction in a particularly high-income year

• You’re using a spousal RRSP to facilitate income splitting

• You know you won’t need access to the money until retirement

• You’re receiving employer matching contributions

• You have sufficient assets to offset the final tax liability on death

The problem arises when RRSPs become the only strategy...and no plan exists for the tax bill at the end.

“I’ve Saved in RRSPs My Whole Life - How Do I Make Sure My Kids Get the Money, Not the CRA?”

This is one of the most common concerns I hear from clients. Fortunately, you do have options.

1. Strategic Withdrawals
Creating a plan to gradually “melt down” RRSP balances and move funds into more tax-efficient vehicles before death.

2. Using Life Insurance to Offset Final Taxes
Structuring a policy with enough death benefit to cover the income tax owing on the full RRSP balance at the highest marginal tax rate.

3. Using Life Insurance as a Savings Vehicle
Properly designed permanent life insurance can offer internal rates of return comparable to, or better than, bond portfolios. Funds remain accessible through policy loans, and the death benefit is paid out tax-free to beneficiaries.

Digging Deeper

If this topic raises concerns for you, you’re not alone. Many Canadians are sitting on significant RRSP balances without realizing the tax exposure they’ve created.

I recently covered this in depth in my latest training on retirement planning pitfalls. You can watch it here:

If you’re worried about how your retirement savings are structured, I encourage you to book a complimentary review. We’ll look at what you’re doing now, where the vulnerabilities are, and how your strategy can be optimized.

Worst case? You walk away informed.
Best case? You protect your legacy and keep more of what you’ve worked so hard to build.

Ready to learn how to drastically transform your finances and leave a legacy that truly impacts generations?