Case Study: Susan’s Retirement – RRSP vs. Non-Registered Investing
When Canadians think about retirement, one recurring complaint is that “RRSPs aren’t fair.” The argument goes like this: you get a tax deduction when you contribute, and your savings grow tax-deferred, but then you’re forced to pay full tax when you take money out of your RRIF. Why not just invest in a non-registered account and avoid all that tax at withdrawal?
To test this idea, let’s look at a “case study.”
Susan’s Story
- Age: 65 in 2025 (born in 1960)
- Retirement: Starts January 2026
- Career: Began working in 1984 with an annual income of $27,012
- Earnings growth: Increased with inflation (2.42% annually)
- Portfolio: 80/20 global equity balanced mutual fund
- Assumptions:
- Average marginal tax rate during working years: 18%
- Average marginal tax rate during retirement: 23%
- Portfolio returns: 5.5% in RRSP/RRIF, 5.14% in non-registered due to tax drag
- All contributions made at the beginning of each year
- Tax refunds from RRSP contributions reinvested in a non-registered account
Contributions and Growth
By the end of 2025, just before retirement:
- RRSP contributions: $336,284
- Value of RRSP: $1,066,043
- Tax savings from contributions, all invested in non-registered account: $60,531
- Total value of reinvested refunds at retirement: $176,158
In the non-registered scenario, where Susan skipped RRSPs entirely:
- Total value by end of 2025: $978,656
- (Lower than the RRSP path due to no tax deduction and ongoing tax drag.)
Withdrawals in Retirement
Now the real question: what happens when Susan starts drawing income?
RRSP/RRIF Path
- After-tax RRIF income over retirement: $1,627,068
- Plus, after-tax income from reinvested refunds over retirement: $309,524
- Total after-tax income over retirement: $1,936,592
- End-of-life balances: $426,915 (RRIF) + $63,670 (non-reg)
Non-Registered Path
Three ways of testing withdrawals:
- Same withdrawal percentage as RRIF
- After-tax income: $1,785,847
- End-of-life balance: $353,722
- Same gross withdrawal in dollars as RRIF
- After-tax income: $1,891,227
- But Susan runs out of money two years early (age 93 instead of 95)
- End-of-life balance: $0
- Same after-tax withdrawals in dollars as RRIF
- After-tax income: $1,722,782
- End-of-life balance: $456,073
What Made the Difference?
- Marginal tax mismatch
The case study used the Year’s Maximum Pensionable Earnings (YMPE) and then worked backward by the rate of inflation (2.42%). The marginal tax rate throughout Susan’s working years was averaged, resulting in less tax being paid during her working years (18%) than she faces in retirement (23%). This is unusual. For many Canadians, retirement income is taxed at a lower rate than working income, making RRSPs even more attractive. - Reinvested refunds matter
Despite her low tax rate, when Susan reinvested her tax savings, her RRSP strategy looked much better. Ignoring refunds underestimates the value of RRSPs. - Non-registered flexibility
Non-registered accounts offered more tax-efficient withdrawals (about 6.3% effective rate versus 23% for the RRIF), which helped stretch income, but at the risk of running out of money earlier in non-registered Scenario 2. - Estate taxation
This case study focuses on retirement income, but estate consequences are worth noting. A large RRIF at death can be heavily taxed if there’s no surviving spouse. By contrast, non-registered assets benefit from the capital gains inclusion rate, often leaving more after-tax value. Careful planning can soften the RRIF impact, but the tax treatment difference is real.
Conclusion
In Susan’s case, the non-registered account sometimes generated more after-tax income, but at the cost of running out of money early in one of the three non-registered scenarios. The RRSP/RRIF strategy, when combined with reinvested tax refunds, proved more reliable and left a meaningful estate balance at the end of life.
It’s important to remember that this case study reflects Susan’s working life beginning in the mid-1980s, when the RRSP was the only meaningful tax-sheltered account available. The Tax-Free Savings Account (TFSA) did not exist until 2009. Had TFSAs been available earlier, some of the non-registered contributions could have been redirected there, producing even more tax-efficient results. For simplicity, however, this comparison assumes a world without TFSAs.
The key lesson is this:
- RRSPs are not “unfair.” They simply shift taxation from today to tomorrow.
- For most Canadians, RRSP contributions are made at a higher marginal tax rate during working years and withdrawn at a lower rate in retirement. That’s when RRSPs shine.
- In rare cases like Susan’s, where retirement tax rates are higher than working tax rates, non-registered investments can look more attractive.
The decision should always be based on personal tax circumstances, retirement income projections, and whether reinvested tax refunds are truly put to work.
This is the 298th blog post for Russ Writes, first published on 2025-09-08.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.