Why raising RRSP contribution limits could do more harm than good

A leading think tank is calling for a raise in the annual RRSP limit from 18% to 30%

Why raising RRSP contribution limits could do more harm than good
The CD Howe Institute may have to think twice before urging Ottawa to raise the limit on registered retirement savings plan (RRSP) contributions.

Industry expert Dale Jackson told BNN that CD Howe should reassess the merits of raising the limits because it could end up being a bad thing for Canadians. Citing a recent report from the institute, he said CD Howe wanted to raise the annual limit to 30% of the previous year's income from the current 18%.

CD Howe argued that the current RRSP limits have not kept up with the longer life expectancies and lower returns on savings. It is also pushing for special considerations for late-savers, members of defined-contribution pension plans, and inflation-adjusted limits for the future.

Also Read: Why RRSP investors should rebalance away from stocks

More so, the institute stressed that defined-contribution pensions are at a disadvantage to defined-benefit pensions due to the fact that the limits do not allow late-life plan holders or savers trying to get back from a market slump.

"But, as the old saying goes: be careful what you ask for. RRSP contributions can be deducted from taxable income, but those contributions, and all the gains they produce as investments, are fully taxed when they are withdrawn in retirement," Jackson said.

He underscored that increased assets in an RRSP can put savers in a high-tax bracket. This would eventually lead the federal government to force savers to make minimum withdrawals.

"The advent of the tax-free savings account in 2009 helps alleviate an RRSP tax trap. TFSA contributions and gains are never taxed, allowing retirees to top up their income beyond RRSPs without negative tax consequences," Jackson said.

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