Low income? Hold off on the RRSP

There’s a lot of pressure to contribute to an RRSP, but sometimes it makes more sense to wait.

empty red wallet women


Q: I have a Ph.D., but I’m having a tough time finding a well-paying job. For the past year and a half I have been making do with low-paying, part-time work. That said, I am frugal and have maxed out my TFSA and invested in some equity ETFs and a GIC in a non-registered account. I am wondering whether it is a good idea for me to transfer these non-registered investments into an RRSP or to keep waiting until I secure a well-paying job.

A:  I can only imagine how impatient you must be to get moving on your career. The Kraft Dinner diet works for a while, but then your stomach grumbles for something a little more substantial. You invested many lean years toiling away on your thesis and now that you’ve earned your Ph.D. you want to see the payoff: Interesting and challenging work and hopefully a good income to go with it.

Impatience on the work front will serve you well, provided that you can channel it towards the schmoozing, applying and interviewing that a job search requires. But at this point in time you don’t need to be impatient about saving for retirement. Contributions to your RRSP can wait, for now.

Low income and RRSP

The big wow of contributing to an RRSP is that it allows you to defer income tax to a point in the future when you are no longer drawing a pay cheque and will presumably be in a lower tax bracket. But since you are already in a low tax bracket you have much less incentive to defer income tax. Transferring those investments into an RRSP will generate a tax refund, but you’re better to wait until you’re in a higher tax bracket to take advantage of it. (It is worth noting that you could transfer the money to your RRSP and then carry forward the deduction to a future year—but that seems like a lot of work).

Your frugal behavior has clearly served you well in these lean times, as demonstrated by the fact that you have a maxed out TFSA and a non-registered account with something in it. Keep doing what you’re doing and when the income you seek starts to flow you’ll be able to build your retirement savings at a pretty nice clip.

The freedom of financial flexibility

What is awesome about your story is that you not only finished your studies without racking up a truck full of debt, but you have savings in the bank. If you found a job in some far-flung land, you would be able to take it because you have the freedom of financial flexibility. You’d have the $10,000 you would need to move to another city. And your non-registered investments could go towards the down payment on a home if you got a tenure track position somewhere, or a reliable used car to get to your great new job.

Transferring your savings to an RRSP will reduce your flexibility. While you’d be able to cash it out, there would be a tax hit and it would be annoying to do. I think it is better to continue saving what you can, and wait until you have some certainty about where you’ll be living and what you’ll be earning before you put the money in an RRSP.

Develop strong savings habits regardless of income

You have already demonstrated that you know how to save money and those habits will come in handy in life, as I said. Which is the second reason why I think you can wait to transfer those investments into an RRSP. You already have discipline. And the sad reality is that most people don’t.

For other people I might say that they should make small contributions to an RRSP, even if their income is low. The reason is that most people need to develop the habit of saving for a long-term goal. And saving in an RRSP is a great way to develop that habit.

Good luck to you. And as the saying goes, “write if you get work.”


Get more:

MoneySense RRSP Guide 2014