Investment Insight: Q1 2026 RRSP Season is Here Again
The RRSP: Why Are We Falling Short? Debunking Two Myths
While many of us are unhappy about the high taxes we pay, one way to ease the burden is by fully using tax-advantaged accounts. Yet RRSP participation rates have declined over the past two decades, from 29.1 percent of taxpayers in 2000 to just 21.7 percent in 2022.
The introduction of the Tax-Free Savings Account (TFSA) in 2009 and persistent misconceptions about the RRSP have contributed to this decline. Let’s address two common myths:
Myth 1: It’s better to invest in a TFSA than an RRSP.
In fact, the RRSP generally yields a greater benefit if you expect a lower tax rate in retirement. Many contribute during higher-income working years and withdraw when income is lower in retirement, leading to an RRSP advantage. A TFSA may be better only if you have a higher tax rate at withdrawal or face recovery taxes for income-tested benefits like Old Age Security.
Myth 2: RRSPs aren’t worth it because withdrawals are fully taxed.
While RRSP withdrawals are taxed as income, the initial tax deduction at contribution is often forgotten. A $30,000 RRSP contribution is equivalent to an after-tax contribution of $18,000 at a 40 percent marginal tax rate. Even if your tax rate is higher at withdrawal, you may be better off than in a non-registered account due to long-term tax-free compounding.
Comparative Investment Growth (30-Year Projection)
Assumes 5% annual return with 40% tax rate
| Category | TFSA | RRSP | Non-Registered |
| Pre-tax Income Contribution | $30,000 | $30,000 | $30,000 |
| Tax on Income @ 40% * | ($12,000) | $0* | ($12,000) |
| After-tax Contribution | $18,000 | $30,000 | $18,000 |
| Growth (30 Yrs @ 5%) | $77,795 | $129,658 | $77,795 |
| Tax on Liquidation ** | $0 | ($51,863) | ($11,959) |
| Net After-tax Proceeds | $77,795 | $77,795 | $65,836 |
| Gain Vs. non-registered account | 18.2% | 18.2% | – |
*Assumes tax deduction of 40% is claimed to net taxes to zero.
**Assumes deferred capital gains at 50% inclusion rate.
While the fair market value of the RRSP/RRIF at death is generally included in the terminal tax return and taxed at marginal rates, there may be ways to mitigate the potential tax liability. This includes a tax-deferred rollover to a spouse or a financially dependent (grand) child. Another way to manage the potential tax bill is to engage in a “meltdown strategy,” making withdrawals earlier when your tax rate is lower than you expect in the future or at the year of death.
2026 Tax-Advantaged Account Reminders
- RRSP Deadline: The deadline for 2025 contributions is Monday, March 2, 2026.
- Contribution Limit: 18% of previous year’s earned income (up to $32,490 for 2025).*
- 2026 TFSA Dollar Limit: $7,000, bringing the eligible lifetime contribution room to $109,000.
*Plus any previous years’ unused contribution room carried forward, less any pension adjustments.
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