Michael from Gatineau asked the following question about RRSPs:
Is there any benefit to them [RRSPs], if you are not going to wait until your retirement (or until you are in a lower tax bracket) to use them?
Say, if I’m putting money in some index funds for 5 years, and in 5 years I’ll probably be in a higher tax bracket than now. Would it be better to put that money in non-RSP funds so as to pay the tax now and now in 5 years?
I’ll assume that you need the money you are going to contribute to your RRSP in 5 years or so, for some specific reason. There are two parts to your question: (1) Should I put the money in an index fund? (2) Should I park the investment inside a RRSP?
In my opinion, any money you’ll need at a specific time in the short term should be invested such that your principal is guaranteed. Index funds fail this test because even if you invest in a bond fund, which has a low risk profile, there is no assurance that you will get your principal back. The only options that are left are bonds or GICs. You can either buy a 5-year bond or GIC whose maturity date matches your time frame or you could construct a bond ladder.
I think you are better off holding the bond or GIC in a taxable account. Your short time frame and the fact that you are likely to be in a higher tax bracket negate the advantages of a RRSP. A fixed income investment in a taxable account will be taxed at your marginal rate and your principal will barely keep up with inflation. Unfortunately, it appears to me that it is the best option for your situation.