The RRSP Trap: Why Many Canadians Regret Saving in RRSPs

A lot of Canadians assume RRSPs are a no-brainer for saving money. But after years of working with clients, I’ve seen some costly RRSP misconceptions that left them with regrets and tax headaches. Let’s break down the four biggest RRSP regrets and what you can do to prevent them.

Regret #1: RRSP Money is Too Inflexible

Many Canadians regret contributing to an RRSP when they realize how difficult it is to access their money. Unlike a TFSA, where withdrawals are tax-free and contribution room is restored, RRSP withdrawals come with steep tax consequences and permanently reduce contribution room. Those who need quick access to their savings—whether for emergencies or unexpected expenses—often regret locking their money away in an RRSP.

RRSP Withdrawals Aren’t Easily Accessible

A major regret among RRSP holders is the mistaken belief that their savings can be accessed like a regular bank account. In reality, every dollar withdrawn is taxed as income, often pushing people into a higher tax bracket.

Lisa, for example, earns $65,000 per year and withdraws $20,000 from her RRSP for home repairs. Her taxable income jumps to $85,000, increasing her tax bill far more than expected. Worse, unlike a TFSA, she cannot recontribute the money, permanently reducing her retirement savings. Many only discover this issue when they need cash the most, leading to frustration and regret.

RSP vs. TFSA as a Locked vs. Open Safe – A TFSA is like an open safe—you can take money in and out freely. An RRSP? More like a vault with a time lock. Once you put your money in, getting it out comes with a price.

The Withholding Tax Surprise

Another major regret is underestimating the automatic withholding tax on RRSP withdrawals. Many assume they’ll just owe tax at filing time, only to realize that a portion is deducted upfront—leaving them with less cash than expected.

Jeff, for instance, withdraws $10,000 to cover an emergency expense. His bank withholds 20%, meaning he only receives $8,000, while $2,000 goes straight to the government. But when he files his taxes, because his marginal tax rate is higher than 20%, he has to pay an additional $1,000 in taxes.

Similarly, Mariah, a retiree, withdraws $25,000 for a vacation. Her bank automatically withholds 30%, leaving her with $17,500. At tax time, her total income places her in a higher tax bracket, forcing her to pay another $2,500 beyond what was already deducted.

Many regret assuming that the withholding tax was the final amount owed, only to get a nasty surprise at tax time. This makes RRSP withdrawals far less appealing than they initially seemed.

Before contributing to an RRSP, ask yourself one question: Do I need this money before retirement? If the answer is yes—or even maybe—a TFSA or other account might be a better choice. But if you’re using an RRSP strategically for retirement long-term tax savings, it can be a powerful tool. The key is to plan ahead so your RRSP works for you, not against you.

Regret #2: Tax Refund Disappointments

Many Canadians regret contributing to an RRSP when their expected tax refund falls short. While RRSP contributions provide a tax deduction, the actual refund depends on income level and overall tax situation. 

The Refund Wasn’t as Big as Expected

A common misconception is that RRSPs always generate a large tax refund. In reality, the size of the refund depends on marginal tax rates. A high earner making $100,000 will see a far greater benefit from RRSP deductions than someone earning $45,000, whose lower tax rate provides a much smaller refund. Many regret not realizing RRSPs favour higher earners, leaving them disappointed when their refund doesn’t meet expectations.

Wasting the Refund Instead of Reinvesting

Even when people receive a refund, many regret not using it wisely. Instead of reinvesting, they spend it on non-essential purchases, defeating the purpose of the RRSP’s tax advantage. A smarter move would have been to use the refund to pay down high-interest debt or invest in a TFSA, which allows tax-free growth and withdrawals. Many realize too late that they missed a key opportunity to build more wealth.

RRSPs Weren’t the Best Choice

For some, especially low-income earners, a TFSA would have been a better option. Unlike RRSP withdrawals, which are fully taxable, TFSA withdrawals are tax-free, providing greater flexibility. 

Some regret contributing to an RRSP when their income was too low to maximize tax savings, only to withdraw later in a higher tax bracket, negating the tax advantage. A better approach would have been to contribute when income is high and withdraw when it’s lower.

Before we go onto our next regret, if tax savings are on your mind, check out our guide on 7 powerful income-splitting strategies to legally reduce your tax bill. 

Get your free guide on our website here:
https://blueprintfinancial.ca/income-splitting-strategies-download/

Regret #3: RRSP Investing Without a Clear Strategy

Many Canadians regret contributing to an RRSP without a solid investment plan. With so many choices, some freeze and do nothing, while others take on too much risk—both mistakes that can hurt long-term returns.

Too Many Investment Choices Lead to Paralysis

RRSPs allow investments in stocks, bonds, ETFs, mutual funds, and GICs, which sounds great—until the overwhelming number of options leads to decision paralysis. Some contributors leave their RRSP funds sitting in cash, missing out on years of potential growth. 

Others blindly follow high-fee mutual fund recommendations from banks, not realizing how much those fees eat into their long-term returns. Many regret not having a clear strategy from the start and wish they had taken the time to learn about investment options before contributing.

Taking on Too Much Risk Causes Stress

Some RRSP holders go all-in on high-risk stocks, hoping for big gains but without fully understanding market volatility. When the market drops, panic sets in, leading to rushed decisions and selling at a loss. Unlike a TFSA, where lost money doesn’t affect contribution room, every dollar lost in an RRSP is gone forever. Many investors regret not diversifying their portfolio, realizing too late that risk without strategy is just gambling.

Playing It Too Safe Hurts Growth

On the flip side, some investors are too conservative, keeping their RRSPs in low-interest GICs or money market funds. While this avoids volatility, it also means their money barely keeps up with inflation, limiting retirement income. Many realize years later that their savings didn’t grow enough, wishing they had been more balanced in their approach.

To avoid RRSP investment regrets, start with a clear strategy—don’t just contribute for the tax break. Choose investments that match your risk tolerance, balancing growth (stocks) and stability (bonds) to avoid taking on too much or too little risk. Stick to low-cost ETFs or index funds instead of high-fee mutual funds, and don’t leave cash sitting idle. 

I go over this in way more detail in another video about RRSP Millionaire Secrets, so be sure to check that out!

Regret #4: RRSP Withdrawal Challenges in Retirement

Many retirees regret not planning their RRSP withdrawals properly, leading to higher taxes, lost government benefits, and forced withdrawals that don’t align with their financial needs.

The RRSP Refund Illusion as a Boomerang – “Getting an RRSP refund feels great—like throwing a boomerang and getting cash back! But what most people don’t realize is that it swings back later when taxes hit you on withdrawals.”

Unexpected Tax Burden on Withdrawals

Unlike TFSAs, every RRSP withdrawal is fully taxable income, which can push retirees into a higher tax bracket.

David, for example, earns $40,000 from CPP and a pension. He withdraws $50,000 from his RRSP for home renovations, increasing his taxable income to $90,000 and triggering a much larger tax bill. He could have reduced his tax burden if he had withdrawn smaller amounts over multiple years.

Forced Withdrawals at 71

By age 71, RRSPs must be converted into an RRIF, requiring mandatory withdrawals every year—whether the retiree needs the income or not. It’s kind of like Cinderella at midnight—except instead of turning into a pumpkin, it turns into mandatory withdrawals and tax bills.”

Michael has $500,000 in his RRSP when he turns 71. Under RRIF rules, he must withdraw $26,400 (5.28%), increasing his taxable income to $76,400. This pushes him closer to the OAS clawback threshold, creating unnecessary tax complications. As he ages, higher withdrawal rates force him to take out more, compounding the problem.

Losing OAS Benefits Due to RRSP Withdrawals

Old Age Security (OAS) starts getting clawed back at $90,997 (2024 threshold). Large RRSP withdrawals can push retirees over this limit, reducing or eliminating OAS payments. Many regret not spreading out withdrawals earlier to avoid losing thousands in government benefits.

RRSPs can be a powerful tool, but only if used wisely. At Blueprint Financial, we help Canadians avoid these common regrets I just mentioned, save on taxes, and build a solid retirement plan. If you want a strategy tailored to you, check out our services at our website.