Three reasons why you should NOT contribute to an RRSP:

Reason number one: You may not be a paper asset investor.

Canadian mainstream media, financial planners, and financial institution advertising have made the word 'investing' synonymous with financial markets as though there are no other options. Most financial news articles, talking heads, and advertisements are geared to investing in paper assets. Ironically, they often talk about the importance of 'diversification' but it is normally within the same asset class: paper assets.

Paper assets fit well into the RRSP (and TFSA) propaganda machine. But not everyone wants to buy in. It takes some mental effort to break out of this mindset and consider other options.

What are other options? There are other asset classes to invest in which include commodities such as physical silver or gold, income producing real estate, and business. These asset classes do not fit in the RRSP model therefore you seldom read about them in financial articles, financial institution advertising, or the financial planner industry.

It is important to determine what type of investor you are before you start investing. If you want to invest in non-paper asset markets then do not contribute funds to an RRSP.

Reason number two: One of the underlying concepts is flawed.

RRSPs are promoted as a vehicle to both defer and save tax. They are used to defer tax by putting off paying tax on contributions and earnings within the plan until a later date (retirement). But how are they used to save tax? The concept is this: contribute to an RRSP from income that would be taxed then withdraw in later years when your income is lower and taxed at a lesser rate. Awesome. Works great. But wait a minute? Are you planning for your income to drop? Who is helping you with this plan? Why are you planning for a decreased income right when the fun is supposed to start? The cost of living isn't going down. Will all of your debt be paid off? Are you curtailing your lifestyle? Something has to give with decreased income.

If you are making investment plans to maintain or increase your income in later years, or some other factor can be foreseen to increase your income in later years, contributions to an RRSP may not make sense. Especially if you are making contributions while your income is at a lower to mid-level tax bracket.

Reason number three: bad debt.

Bad debt is debt that is used to buy anything but assets and usually comes with a premium interest rate. It is important to define assets in this situation: assets generate income. If you have debt that was used to buy anything but an asset you should consider repaying this debt before contributing to an RRSP.

RRSPs work well for some individuals and families but they are not for everyone. Give it some thought in terms of what you want to invest in, what your long term plans are for your income level, and what your current financial situation is as to whether RRSPs are right for you.

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