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Money Minute: Who should not get RRSPs

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RRSP season always brings with it this unsettling fear that if you don’t have millions of dollars tucked away in some hidden box marked “retirement” you’re in trouble.

“A lot of people end up freaking out and not doing anything about it because they think it’s hopeless,” says David Trahair, financial writer and accountant at David Trahair and Associates.

It’s what spurred him to write his latest book, which looks to quell the woes of retirement savings procrastinators.

“I’m 56, raising kids and paying the mortgage – there’s not thousands or tens of thousands of dollars lying around to put in an RRSP, it’s just impossible,” says Trahair. “But the theme is, all is not lost, there’s a lot you can do in ten years or less and that’s what a lot of people are going to be doing for retirement.”

A lot of the mentalityy stems from the fact of the arbitrary guilt that seems to seethe out around RRSP season, he says, but the truth is RRSPs aren’t always the right approach.

“A lot of people hear this thing ‘the magic of compounding’ and think they better start saving for retirement,” he adds. “RRSPs work really well when you’ve got somebody in the high bracket now making their contributions and not in ugly consumer debt.”

They’re built for those who know by the time they need the funds, they’re going to be in a lower tax bracket.

But what about someone buried under debt, asks Trahair.

“There’s no way somebody who has credit card debt charging them 20 per cent interest per year should be making an RRSP contribution,” he adds. “There isn’t an RRSP portfolio on earth with a consistent 20 percent rate of return after fees and taxes – and they’ve got a bigger problem, they’re spending more than they make.”

Then there’s fresh-faced students who also should pump the brakes a little.

“Somebody who just graduated from university and got a job but in the lower level range is going to get very little bang for their buck and very low tax refund on any RRSP contribution,” he adds. Plus they’ll likely be in a higher tax bracket when they decide to pull out the funds.

And then there’s the young homebuyer.

“The government has this RRSP home buyer’s plan that allows people to take up to $25,000 each out of their RRSP to make a deposit on the first house,” he says. “Then, after a year ‘holiday’ they have to start replenishing or paying back their RRSP over the next 15 years which is very difficult to do because they just bought a big honking house with a big mortgage.”

Which negates the whole saving strategy, with them having to put a one-fifteenth back onto their tax return for the next 15 years adds Trahair.

“Sometimes life gets in the way,” he says.

Confused about whether or not an RRSP is for you? In this week’s Money Minute Yahoo Canada Finance’s Ashleigh Patterson takes a look at who doesn’t fit the bill.