While a RRSP contribution probably makes sense for most people, there are some situations where other alternatives make more sense:
- Carrying consumer or credit card debt: Credit card debt is typically very expensive with double-digit interest rates. Even an unsecured loan from a financial institution will typically charge interest in the high single digits for clients with a good credit history. There is simply no investment available that will provide a similar after-tax rate of return as simply paying down consumer debt.
- Already in the lowest tax bracket: Since withdrawals from a RRSP are counted when calculating income-tested benefits such as the Guaranteed Income Supplement (GIS), provided by the government for low-income seniors, low-income Canadians might be better off avoiding RRSPs. (Note to the Tories: How about bringing back the Registered Prepaid Savings Plans?)
- Higher tax bracket in retirement: If retirement income is going to push someone into a higher tax bracket, tax deferral is the only benefit provided by a RRSP. Other options such as paying down the mortgage or investing in a taxable portfolio might be more attractive.
- Lot of RRSP assets and a big mortgage: The RRSP versus mortgage debate depends so much on what assumptions are made but when someone already have a significant amount of assets in a RRSP but are also carrying a large mortgage, they might be better off paying down the mortgage.
Can you think of any other situations in which a RRSP contribution does not make sense?