Two reasons to avoid RRSPs

High income.  Low income.  Both situations might signal that your retirement savings be directed somewhere other than an RRSP.  

A lot of readers bitterly complain to me about having to pay tax on RRIF withdrawals but, please, get over it.  You don’t pay tax on the contributions or the growth, so don’t fret about paying tax on the withdrawals years down the road.  

Having said that, a combination of a high pension income, a large RRSP and other earnings, such as rental income, might make non-RRSP investing a better choice.  It could also help you avoid Old Age Security clawback which begins at a net income of  $67,668.  

Those with low incomes should also consider RRSP suitability.  If you are in hailing distance of retirement, say 55 or older, and you have a good idea that your income, post age 65, is going to be under $20,000, then savings (or an employment or inheritance lump sum) might be better directed at a non-registered account or a Tax Free Savings Account. 

Lower income seniors can qualify for the Guaranteed Income Supplement (GIS) at a net income (excluding OAS) of $15,888 and less for 2011.  The required RRIF withdrawals after age 71 could easily push an individual past the GIS threshold. 

GIS rates change annually, so 10 years from now it’s a reasonable bet to assume the maximum threshold will be $20,000 or more. GIS payments are graduated.  Currently, single, widowed or divorced pensioners can receive maximum monthly payments of $661.69 while those with an income of $15,887 would get just $1.69 monthly. 

You can check out scenarios that match your situation at Service Canada.  Or, use the Moneyville calculator that  compares RRSPS to non-RRSPs.

No one wants to pay unnecessary tax, so a little planning before retirement will give you a pretty good idea whether or not RRSP contributions are in your best interest.