When it comes to retirement savings in Canada, the venerable Registered Retirement Savings Plan (RRSP) is considered a foundational tool — a tool that helps almost every Canadian to save and plan for a comfortable retirement.
The RRSP is designed to provide tax-assisted growth and long-term compounding. As a result, this savings tool remains one of the most powerful vehicles for Canadians who want to grow a retirement nest egg.
But in recent years, a troubling trend has emerged: Canadians are under-using their RRSPs. Even worse is that more Canadians are starting to withdraw from this retirement savings account during their prime earning years — undermining the very benefits the vehicle offers.
A report published by Canadian tax expert Jamie Golombek (1) highlights fresh data from the C.D. Howe Institute showing that for every $3 contributed to an RRSP or a similar tax-advantaged plan, Canadians are withdrawing around $1. Turns out the the biggest culprits for early withdrawal are Canadians between the ages of 45 to 59. This means that this pre-retirement cohort is tapping into their savings early, rather then keeping these funds for their non-income earning years.
That’s not the only alarming trend when it comes to RRSPs. According to Statistics Canada, contribution rates to RRSPs are declining (2). In 2022, only 21.7% of tax filers made an RRSP contribution, down from 22.4% the year before (the downward trend resumed after a temporary pandemic-related bump). Moreover, participation varied dramatically by income: in 2022 roughly 1.7% of tax filers with incomes under $20,000 contributed to an RRSP, compared to about 66.2% of those earning between $200,000 and $499,999 (3). These data illustrate both the declining participation and the uneven usage of RRSPs across income groups, but also reinforce the risk inherent when people both under-contribute and withdraw too early.
Why worry? Because the very value of an RRSP lies in long-term growth and deferral of tax until retirement (when your tax rate is typically lower, as you earn less from non-employment resources). If you contribute early, ride out decades of market returns, and delay withdrawal, the compounding effect can be substantial. But if you delay contributing — or worse, withdraw early — you lose years of growth, erode your tax-deferred base and undermine retirement security.
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Golombek points out that even withdrawals which seem innocuous (such as using the Home Buyers’ Plan) can derail the long-term power of the account (4). When you withdraw before retirement, the tax-deferral benefit collapses and you replace potential decades of growth with a taxable event.
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The reasons behind these trends are at once understandable and worrying from an investor-behaviour perspective. On the one hand, Canadians face competing priorities: mortgages, kids, debt, day-to-day cost pressures — all of which can tempt withdrawal. On the other hand, early access to an RRSP feels convenient, particularly if faced with lower-earnings or less income, due to family circumstances or job loss.
But discipline is key. As Golombek points out: If you tap your RRSP in your 40s or 50s, you may be sacrificing a decade or more of growth. Let’s say you contribute $10,000 at age 35 instead of withdrawing it. Assuming a real return of 5 % per year (after inflation), this initial $10K investment could grow to nearly $43,200 by age 65. Withdraw it today, and you lose not just the principal but all future growth — tax-efficient growth, no less.
And fewer contributions today means less base for compounding tomorrow. With only about one-fifth of tax filers contributing to RRSPs in 2022, many Canadians are simply missing out on having their money earn money.
Here are some practical steps Canadian investors can take to get back on track — and use the power of RRSP earnings:
Automate contributions: Set a monthly contribution into your RRSP so you don’t have to think about it. Small, consistent contributions over time can build into meaningful balances thanks to compounding.
Avoid tapping the account prematurely: Use withdrawal options only when genuinely necessary. Treat your RRSP as a retirement-only vehicle unless you have no alternative.
Stay invested for decades: The longer you allow your dollars to grow, the stronger the compounding effect. Discipline now pays off later.
Prioritise contribution access: If you have RRSP room and tax-advantaged funds, make it part of your strategy. Under-contributing today often means being forced to catch up later when there’s less time.
Educate and plan: Many Canadians are unfamiliar with how RRSPs work (vs. TFSAs, etc.). Understanding the rules, benefits and pitfalls can make a real difference. For example, even though a TFSA offers great flexibility, it doesn’t offer the upfront tax deduction that an RRSP does — and for higher-earnings Canadians expecting a lower tax rate in retirement, the RRSP still makes sense.
Tax & Estate Update 2018 | Jamie Golombek Managing Director, Tax and Estate Planning
The phrase “walking away from free money” isn’t hyperbole: The tax deduction today, the tax-deferred growth for decades, and the compounding effect together represent a significant opportunity. But as the data shows many Canadians are contributing less — and withdrawing too early — which may end up compromising their retirement security.
The good news? The path to improvement is behavioural and actionable. With some discipline, planning and understanding of how RRSPs work, Canadians can reclaim this “free money” opportunity. The sooner the better — because when you give up years of compounding by withdrawing early or not contributing, you give up potential decades of growth.
By keeping your focus on the long game, treating your RRSP contributions like a baseline habit, and avoiding the temptation to raid your retirement savings in your prime years, you’ll be far more likely to reach the retirement income you deserve.
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CIBC (1, 4, 5); Statistics Canada (2); Statistics Canada (3, 6, 7)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.