Can you have too much in an RRScP?

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I was chatting with an accountant, and we reviewed a proposed RRSP max strategy.

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This was one of her questions to me - I am concerned that the RRSP balance will get too big - what are your plans to deplete the RRSP?

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Why is it a problem if the RRSP gets too big? In the year of death, the entire account is treated as income on the final return. (unless there is a spouse which is a crucial consideration).

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So, a $1.5 million RRSP will turn into $738,733 in Ontario after tax. That is over a 50% decrease in value. Some may look at this on the surface and think this is an excellent reason not to invest in an RRSP.

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As usual, what often looks bad on the surface requires more analysis. Let's dive in.

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This is not an RRSP vs TFSA scenario. When dealing with high earners, both are utilized. The choice is usually to fund a Non-registered taxable account or contribute to an RRSP.

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Let's look at both options - RRSP Max vs equivalent contribution to Non-registered.

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Assumptions:

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$250k income earner in Ontario

Marginal Tax Rate: 53%

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RRSP Contribution: $30k - not adjusted to inflation

Projected Growth Rate: 5.58% (straight line returns)

Account / Advice Fees: 1.35%

Age contributed: 35-60 (25 years)

Pre-tax balance at age 60: $1,800,000

After tax balance at age 60: $878,145

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Vs:

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Non - Registered Contribution: $30k

Projected Growth Rate: 5.58% (tax drag not calculated)

Account / Advice Fees: 1.35%

Age contributed: 35-60 (25 years)

Pre-tax balance: $1,416,280

After Tax Balance: $1,331,286 (deferred capital gains)

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See RRSP is worse...? nope not at all.

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With the RRSP contribution the income earner would get approximately a $15K tax refund calculated as their marginal tax rate x their contribution.

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One accurate example of an apples-to-apples scenario would be showing the additional $15k invested in a non-registered account alongside the $30k RRSP.

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So instead of illustrating a $30k RRSP vs a $30k non-reg contribution, we should show a $30k RRSP plus a $15k non-registered contribution vs a $30k non-registered contribution. (we could reverse engineer this to look at the total cost of contributions - the concept is the same.)

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The numbers change drastically. Assuming the same variables as before the new scenario is:

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RRSP after-tax balance at age 60: $878,145

Plus Non-Registered after-tax balance of: $668,048

Total: $1,546,193

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Vs

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Non-Registered After tax balance at age 60: $1,331,286

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When calculated correctly, the RRSP often comes ahead of a non-registered strategy. Even in a year where the entire tax bill on a significant amount is owed at once (rare due to spousal rollover provisions and life expectancy)

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*taxes owed on dividends and interest earned in non-registered have not been illustrated.