by Lana Sanichar

Often I receive questions from readers about when it is and when is it not appropriate to contribute to a registered retirement savings plan (RRSP) or a tax-free savings account (TFSA).

I reached out to Jason Heath, a certified financial planner and managing director of Objective Financial Partners Inc., for his tips on when it does and does not make sense to contribute to your RRSP. Here’s what he had to say.

• RRSP contributions save you tax because you can deduct them from your income. If you had an income of $75,000 in 2022, an annual $100 RRSP contribution will reduce your taxable income and save between $28 to $38 of tax, depending on your province or territory of residence. That means a tax savings of 28% to 38% on the RRSP only. If you make a larger contribution, or if you have other tax deductions, like child care expenses or pension contributions, for example, you may not save as much tax. As your taxable income goes down, so too does the tax savings from an RRSP contribution or other deduction.

• If your taxable income is below $50,000, the tax rate you pay on withdrawing from your RRSP in retirement may be higher than the tax rate you save on the initial contribution. This can make RRSP contributions questionable at lower levels of income. The higher your income is above $50,000, the more beneficial RRSP contributions could be for you. If your income is below $50,000, a TFSA may be a better way to save.

• If you have debt, you need to reconsider investing versus paying down debt. Investors with a low risk tolerance may not earn a high enough rate of return to be better off contributing to an RRSP or a TFSA compared to paying down debt. This is especially true if you have no employer matching contributions, like a group RRSP or a defined contribution pension plan, or if you have high-interest rate debt, like a balance you are carrying on your credit card.