I've had some interesting discussions on the topic with skeptics, who make some excellent points about why they don't contribute. They say that if you keep all your investments in this so-called tax shelter, you'll miss out on juicy tax breaks for capital gains and dividends. This is true. They say that once you retire, you'll be forced to withdraw your RRSP as income, and that income could cause the government to claw back thousands of dollars in Old Age Security payments. This is also true. They say that if your income is low, there's no real advantage to saving for retirement through an RRSP. True again.

So should you forget about contributing to your RRSP? Let's examine each of these arguments in more detail.

The pains of gains

If you invest outside an RRSP, you pay tax on only half of your capital gains. If you put all of your retirement savings into registered investments, you pay tax on your full profits when you take your money out of the RRSP.

This makes it sound like non-RRSP saving is the way to go. KPMG's personal financial planning division in Vancouver ran an analysis of the two strategies a while back. They discovered that if you made identical annual contributions to identical all-stock portfolios beginning at 40 -- one in an RRSP and one outside -- and then you liquidated both portfolios when you hit 69 and paid all taxes, you would have done considerably better outside an RRSP.

So why would you bother with an RRSP? Because KPMG assumes you would save the same inside as outside an RRSP. That's not realistic. You usually get a tax refund when you contribute to an RRSP. This is extra money you can save for retirement that you wouldn't otherwise have. "If you're in the top tax bracket," says Malcolm Hamilton, worldwide partner at Mercer Human Resource Consulting, "you can put $2 in an RRSP for the same cost as saving $1 outside. That means you've got $2 earning capital gains or dividends, instead of $1. And that more than compensates for the tax breaks on dividends and capital gains."

The dreaded clawback You may have heard horror stories of nasty bureaucrats punishing seniors for building up a large RRSP nest egg by clawing back their Old Age Security payments. It's true that if you convert your RRSP to an annuity or RRIF that supplies you with a large income when you retire, your OAS payments are reduced. But should that keep you from contributing to your RRSP?

The simple answer is no. In 2005, a senior would have had to enjoy an income of about $61,000 before he or she would have lost a cent to clawbacks. The clawbacks start at such a high income level that fewer than 5% of seniors are ever affected. In fact you would have to make almost $100,000 a year during retirement to see your OAS completely disappear. Thus OAS clawbacks will only be an issue if you're hugely successful at saving for retirement -- and in such a case, you're probably not going to miss the money.

Ages and wages

There are some valid reasons not to contribute to an RRSP. If you make less than $30,000, an RRSP might not be worth it, because your income tax rate is already so low you're not going to get much of a tax refund for your contribution. Youth is also a passable excuse. If you're in your 20s or your 30s, you have many demands on your income, and saving for retirement might not be the most important priority, says Hamilton. If you have a large credit card bill, for instance, you should pay that off first, because you effectively get a return of up to 18% on your money when you factor in the saved interest: no RRSP is likely to match that return. Even mortgage payments should come before RRSP contributions for many people, since paying off your home, which reduces your expenses and builds up your net worth, is the foundation of most successful retirement plans.

Still, if you have the money to save for retirement and you make more than $30,000, an RRSP is an excellent way to save for retirement. So don't believe the naysayers. As Hamilton says, the system works. Now if only more Canadians would listen.