Should You Max Out Your RRSP? Two Stories, Two Different Outcomes
The Unexpected Problem
The RRSP (Registered Retirement Savings Plan) has long been considered a cornerstone of Canadian retirement savings. It offers tax deductions now, tax-deferred growth, and (presumably) lower taxes in retirement. It’s often described as a “no-brainer” for Canadians who want to retire comfortably.
On the other hand, some are convinced that the RRSP is a fraud, tempting Canadians with tax refunds now only to have them pay higher taxes in retirement. Oddly, it seems that those who are most likely to complain about this tax-deferral arrangement are those with higher incomes.
The fact is this well-loved strategy doesn’t always lead to the most desirable outcome. Indeed, it could hurt the retirement prospects of lower-income Canadians, especially those who may qualify for the Guaranteed Income Supplement (GIS), a tax-free benefit tied to Old Age Security that is designed to assist those with low incomes in retirement.
Disorientation
Let’s look at a couple of simple case studies to see how this debate over the RRSP may work out.
Case Study 1: Karen (Mission, BC)
Profile:
Karen is 63 years old, single, and a lifelong low- to moderate-income earner, with her 2024 income a modest $34,000.
Assets:
Karen has an RRSP worth $90,000, $6,000 in a TFSA, and a small workplace pension that is projected to generate $200 per month at age 65. Her estimated CPP retirement pension at age 65 is $600 per month.
Her Plan:
Her plan, like that of many other near-retirees, is to draw down her RRSP (converted to a RRIF) in retirement alongside CPP and OAS.
The Problem:
Karen plans to convert her RRSP to a RRIF (Registered Retirement Income Fund) in the year before she retires so that she can begin her withdrawals in the year she retires. This will increase her taxable income after age 65. That sounds good. However, GIS is an income-tested benefit, reduced by $0.50 for every dollar of other income (excluding OAS). Every $1,000 she withdraws from her RRIF will cost her $500 in GIS, plus the tax on her RRIF withdrawal. As a consequence, her effective marginal tax rate in retirement could exceed 60%.
A Better Approach:
Although her intention to retire in two years means her opportunity is limited, Karen could prioritize TFSA savings instead of RRSPs during her remaining working years.
At her age, Karen has accumulated a total of $102,000 in TFSA contribution room, of which she has used less than $6,000 (I assume that part of the value of the TFSA comes from growth within the account). Instead of contributing to her RRSP, she could begin withdrawing from it to bring her taxable income up to approximately $49,000 (the first BC provincial tax tier is 5.06% at a taxable income of $49,279. This would keep Karen at the lowest combined federal and provincial tax rate. Assuming she withdraws $15,000 ($49,000 – $34,000). After tax of $3,000, she could contribute about $12,000 to her TFSA in 2025. She could continue this in 2026 and then, assuming she retires halfway through 2027, she could raise the amount withdrawn to over $30,000 without impacting her tax rate relative to the previous years. In 2028, the first full year of her retirement, she could withdraw the remainder of her RRSP contributing what she can to her TFSA. With her small defined benefit (DB) pension plan she could claim the $2,000 federal pension income amount and the $1,000 BC amount.
This rapid reduction in her RRSP, with only her CPP and DB pension reducing her GIS entitlement will give her access to approximately $900 per month in tax-free GIS.
Case Study 2: Michael and Sarah (Stratford, ON)
Profile:
Michael and Sarah are a couple in their mid-50s, each earning about $95,000/year in stable public-sector jobs. They plan to retire at around age 65.
Assets:
They each hold about $300,000 in their respective RRSPs (including a small spousal RRSP in Sarah’s name to which Michael had contributed when she was off on two parental leaves), and another $50,000 each in TFSAs. They are making ongoing contributions to their DB pensions.
Their Plan:
They want to maximize contributions to their RRSPs to reduce taxable income now and withdraw in retirement, with partial income splitting.
The Fit:
Their respective combined current tax bracket is 29.65% (20.5% federal income tax and 9.15% in Ontario).
A few things to note. Their income in retirement will place them outside the qualifying income range for GIS. However, because their income in retirement is projected to be significantly under the OAS Minimum Income Recovery Threshold or “clawback” ($93,454 for the 2025 income year), they do not need to worry about a reduction of retirement benefits at the higher end.
Michael and Sarah are getting value from their RRSP contributions now in the form of tax deductions and tax deferrals on the growth of their investments.
Their projected future tax rates are likely to be lower, with a combined federal and Ontario provincial rate between 20.05% and 24.15%; this will make their RRSP contributions more tax-efficient than Karen in BC could hope for.
The Insight
These two case studies show that RRSPs aren’t universally “good” or “bad”; they are context-specific tools. The goal is to enable maximum spending, including optimized access to benefits, while limiting taxation. If contributing to an RRSP today leads to higher taxes over one’s lifetime or lost benefits without a compensating increase in income, the strategy fails.
The TFSA, while it lacks the tax deduction of the RRSP, offers more flexibility, and has no impact on government benefits.
The bottom-line insight is that, when planning for retirement, it’s not just about how much you can save, but where you can save it.
The Resolution
Karen’s Adjusted Strategy
Karen effectively converted part of her RRSP to a TFSA by withdrawing portions of it annually before 65 and the first couple of years past age 65 to minimize any disruption in her ability to receive GIS.
While she had contributed little to her TFSA, this case study encourages people at the lower end of the income spectrum to focus on TFSA contributions as their cash flow permits. Even modest amounts help.
It is important for Karen and other retirees to coordinate their CPP and OAS start dates with their RRSP, TFSA, and pension assets to balance tax efficiency and income needs.
Karen is an example of a lower-income earner using the RRSP as a bridge from working life to a more secure retirement. The default way of thinking is to preserve the RRSP until as late as possible in retirement, i.e., converting it to a RRIF at age 71, with the first payments beginning at age 72. The idea is to have the RRSP/RRIF serve as one of your main retirement income sources. For someone like Karen, however, it is often better to think of the RRSP as a bridge to retirement, withdrawing funds at relatively low tax rates while using the after-tax proceeds to fund a TFSA, which has no impact on GIS eligibility.
Michael and Sarah’s Strategy
For Michael and Sarah, the “conventional” approach of continuing to maximize their RRSPs while working makes good sense. However, they do not need to wait until age 71 to convert their RRSPs to RRIFs. Instead, by deferring the start dates on their CPP and possibly OAS, they can use their RRSP/RRIF assets to help fund their retirement income needs until age 70, allowing their guaranteed inflation-adjusted government pension sources to grow in value. This reduces the mandatory amounts that must be withdrawn from their RRIFs in the future adding to their flexibility when it comes to discretionary spending.
This is not to say that their TFSAs play no role at all. It can be a store of extra assets to contribute to their flexible spending without requiring extra income – and extra taxes – from their RRIF withdrawals.
The Invitation
Understanding these dynamics allows Canadians to plan for retirement, not just save as if by rote.
If you are unsure of how to navigate RRSPs, TFSAs, CPP, OAS, and GIS interactions, a financial plan can help you align today’s savings with tomorrow’s spending.
Supplementary Materials
Marginal Tax Rate Cliff for GIS Recipients
TFSA vs. RRSP Comparison by Income Level
RRSP vs. TFSA Income Thresholds by Province/Territory (Estimates)
These thresholds are approximate and depend on individual circumstances, including expected retirement income, eligibility for benefits like GIS and OAS, and tax bracket changes over time. If your retirement income is expected to be high, a TFSA may still be preferable even at higher income levels.
Checklist: Should I Prioritize RRSP or TFSA?
Prioritize RRSP if you answer “Yes” to these:
☐ High current income: You are in a high tax bracket now and expect to be in a lower bracket in retirement.
☐ Desire for a tax deduction: You want to reduce taxable income today and receive a tax refund.
☐ Income splitting opportunity: You have a spouse and plan to split RRSP income in retirement.
☐ Employer RRSP matching: Your employer offers matching contributions to an RRSP.
☐ Long-term retirement focus: You won’t need to withdraw funds before retirement.
☐ Anticipated lower income in retirement: You expect to withdraw RRSP funds at a lower tax rate than your current rate.
☐ No concern about OAS clawback: Your retirement income won’t exceed the threshold that triggers Old Age Security (OAS) clawbacks.
☐ Not eligible for GIS: You won’t qualify for the Guaranteed Income Supplement (GIS), so RRSP withdrawals won’t impact benefits.
Prioritize TFSA if you answer “Yes” to these:
☐ Lower current income: You are in a lower tax bracket now and expect to be in a higher bracket in retirement.
☐ No need for a tax deduction: You don’t need an immediate tax refund.
☐ Flexibility in withdrawals: You may need access to funds before retirement.
☐ Concern about OAS clawback: You want to avoid taxable withdrawals that could reduce OAS benefits.
☐ Eligibility for GIS: You want to ensure withdrawals won’t affect GIS eligibility.
☐ Already maxed out RRSP contributions: You’ve contributed the maximum allowed to your RRSP.
☐ Uncertain retirement plans: You want flexibility in how and when you use your savings.
☐ Desire for tax-free growth: You prefer tax-free investment growth and withdrawals.
This is the 286th blog post for Russ Writes, first published on 2025-04-21.
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