Yes, you read that correctly. Sometimes your financial plan could benefit from you stopping your RSP contributions. On occasion when I have advised someone to discontinue new RRSP contributions, my advice has been greeted with confusion or surprise. Imagine that – a financial planner advising against RRSP’s – I’m told this is the last thing expected. But understand, this is not a broad sweeping statement. It is only good advice for certain people depending on income, tax status, projected retirement income, and other variables. It is personalized advice meant for that person and if suitable we usually we stop RRSP contributions in favour of something else. In other words for some people their money is better put toward a different investment type like a TFSA for example. Everyone’s situation is different.
As with most financial professionals, my advice is different for different people to suit their situation. In fact, I would be wary of anyone with a matching plan for everyone. I don’t ever advise either for, or against RRSP’s as a ‘one size fits all’ strategy. Nor do I advise for, or against TFSA’s as a broad based general approach. Each situation requires different advice. Financial Planners will suit their advice according to your situation and what is needed for your financial plan. This is at the very core of financial planning. Customization is based on income, tax bracket, employment, pension options, benefit packages, family situation etc.
So, why bother mentioning this? Well, the answer is simple. All too often I see people misunderstand a particular financial product or strategy and paint it with a brush labelled ‘good’ or ‘bad’.
It is easy to listen to a friend relaying their understanding of an article they read that all RRSP’s are bad. But they aren’t. RRSP’s are a poor strategy for certain people yes, but a perfect strategy for others. Similarly, it is easy to hear during the water cooler chat at work that TFSA’s are bad. But they aren’t. TFSA’s are good choices in some situations and not so great in others. The same goes for a whole array of financial products.
All too often I see people read an article or watch a show that may highlight the positive or negative attributes of various financial products. From there, people make broad based assumptions they believe apply in all circumstances. Don’t be someone who makes these judgements. There are many good products that are suitable for a variety of situations. You just need to find the right combination for you.
So, back to my original comment, you might be wondering, when does it make sense to stop your RRSP contributions? Depending on the other variables in your financial plan, it might make sense for you to stop these contributions, and re-direct them elsewhere when:
- You are in a low income tax bracket
- You are on maternity leave
- You expect to have a high income in retirement
- You need the opportunity to access money without tax implications
If you fit one of these scenarios, then a chat with your financial advisor may be a good idea to revisit your strategies and make sure you have the right mix of investment types.
Most of all ... remember that all things are not good for all people. Afterall, the title of this column is “Stopping your RRSP contribution can sometimes be a good idea” ...because sometimes an RRSP is a perfect fit!
Stephanie Farrow, B.A., CFP., Stephanie has over 20 years experience in the financial services industry, a diploma in Financial Planning from the Canadian Institute of Financial Planning, and Certified Financial Planner designation. Stephanie has been writing a financial planning column for the local business magazine Elgin This Month since 2010. Stephanie and her husband Ken Farrow own Farrow Financial Services Inc. Our Farrow Financial Services Team.