

It wasn’t that long ago that retirement planning seemed a lot more straightforward: open a Registered Retirement Savings Plan (RRSP), choose your asset allocation, make contributions and—hopefully—watch your money grow. But the simple truth is RRSPs haven’t always been right for everybody: they were just the most popular option for tax-sheltering some of your earnings.

Things radically changed in 2009, however, when Tax-Free Savings Accounts (TFSAs) appeared. In fact, for many Canadians a TFSA can be a better choice, particularly if your income is limited and you can afford to use only one of these tax-sheltered accounts. TFSA contribution room now sits at $36,500 for every Canadian who was at least 18 in 2009, or $73,000 for couples—a sizable amount of money.

Consider, too, that fewer people have employer-sponsored pensions to rely on in retirement. Old Age Security is also being phased in later, meaning future generations will receive less money from the government in their post-working years.

All of which means Canadians need to be more vigilant about their retirement planning. RRSPs remain the pillar of that plan for many people, and it’s now more important to ensure yours is working effectively. Here are three of MoneySense’s seven surprising truths about RRSPs. Many of them go against the conventional wisdom, but our experts say they’ll help you get the most from your retirement savings.

You’re not as rich as you think

“Everyone needs to appreciate that RRSPs are fully taxable,” says financial author Talbot Stevens. With an RRSP, you can defer taxes for years, or even decades. What many investors fail to remember, however, is that deferring taxes doesn’t mean avoiding them altogether.

“The financial industry has sort of led Canadian investors to this view that if you don’t want to pay taxes, then RRSPs are your answer,” says Stevens.

The fallout from of all this, adds CIBC managing director of tax and estate planning Jamie Golombek, “is you could really get into trouble later on thinking you have more money than you actually have.” For example, he says, take someone who is in a 40% tax bracket who has diligently saved and invested for many years, growing his RRSP to a tidy $1 million. If this investor’s tax bracket is unchanged in retirement, he should consider his portfolio to be worth only $600,000 after taxes. “You owe $400,000 to the Canada Revenue Agency,” Golombek points out. “You have to look at that very, very carefully.”