The question is not whether you should, or should not save. It is whether or not to save using a registered retirement savings plan (RRSP). There are advantages to both registered and non-registered savings plans.

A registered plan provides a tax-deferred savings vehicle. Your money grows tax-free until the time you make a withdrawal. All contributions are tax-deductible, meaning that you reduce your taxable income by the full amount of your contribution. This gives you a tax refund or reduces the amount of income tax you pay. You contribution limit is 18% of your prior year’s income (maximum of $15,500 for 2004) less your pension adjustment. You must convert your registered savings plan to a registered retirement income fund (RRIF) no later than the year you turn 69.

A non-registered savings account has no limits to the amount you can contribute. The foreign content rules that apply to registered plans do not apply and there is no age restriction for converting to an income plan. Unfortunately, non-registered plans are not tax-deductible or tax-deferred. Although you will not pay withholding tax on your withdrawals, any income earned or gains realized must be included on your income tax return in the year received. You pay tax as you go with non-registered savings plans.

Clearly, from a tax standpoint, the registered plan has more appeal. However, under certain circumstances it is worthwhile to use a non-registered vehicle. If you have maximized your RRSP contribution limit for the year, your only option is to save any surplus in a non-registered plan. If your goals are short term, it may make sense to save in a non-registered plan. And you may want to consider your tax bracket at retirement before deciding to contribute to a registered plan.

Though tax deductions are often considered the most important reason to contribute to a registered savings plan, you should first analyze your needs. Calculate the tax impact both before and after retirement to decide if it makes sense to contribute to a RRSP. Everyone’s needs are different. Contact your financial planner to determine which savings method is right for you.

This is a monthly article on financial planning. Call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of Fundex Investments with your topics of interest at 798-2421 or E-mail at rick@invested-interest.ca.