Is an RRSP still the best choice?

Surveys pointing to a drop in RRSP contributions are raising concern amongst wealth advisers who say the plan is still the best way for most Canadians to save for their retirement.

About a quarter of Canadian adults aren’t contributing at all to an RRSP and more than a third of those who have one expect to contribute less this year than last, according to a recent poll carried out for ING Direct.

The decline stems from several factors, including increased competition from new investment products, concern about market stability and according to a recent study by RBC the impact of an ageing population.

The RRSP has been around since 1957 and was introduced by the government to encourage Canadians to save for retirement by offering substantial tax benefits.

“For the majority of Canadians it’s still the best option,” said Jamie Golombek, CIBC managing director of tax and estate planning. “There is now competition from TFSA’s, though ideally people should max out both.”

The Tax Free Savings Account was introduced in 2008 and allows savers to invest as much as $5,000 a year. Any growth or income accrued in the account is tax free, although the contribution is not tax deductible.

Contributions into an RRSP are eligible for tax deductions, though the investments will be taxed once the plan is cashed in. Savers can also invest more in an RRSP -- up to 18% of their annual income, or a maximum of $21,000 for 2009.

Golombek argues that for the average Canadian who will probably be in a lower tax bracket once they retire, the RRSP is the better vehicle. It allows tax breaks now and defers the taxation on the investment to the future.

However, for a low-income earner whose tax position is not likely to drop substantially in retirement, the TFSA may be a smart alternative. The plan is more flexible and allows savers to dip in and out if they need the cash without losing benefits.