At this time of the year as a Chartered Professional Accountant, I’m often asked the question “how much should I contribute to my Registered Retirement Savings Plan (RRSP) before the end of February?” Of course, the question arises because you can deduct contributions made in the first 60 days of the year against the prior year’s income. An RRSP can be a great retirement vehicle but consider other options such as non-registered accounts and the Tax-Free Savings Account (TFSA).
One of the biggest questions to ask yourself, when deciding which one makes most sense for you, is what tax bracket am I in during my working life and what bracket will I likely be in when I retire? If you had $90,000 of employment income in 2015, contributing $5,000 to your RRSP will save you approximately $1,970.50 (39.41%) on your 2015 tax return. If in retirement you know you will be around the $40,000 (in current year dollars) level of taxable income, the RRSP strategy might make sense since with current tax rates, most of your income in retirement will taxed at 20.05% or lower. In practice, what you see too often is people making contributions to save tax at levels similar to where they will be in retirement.
In those cases, perhaps using a TFSA makes a lot more sense. There is no immediate tax savings but there are no future tax liabilities either (like there is with RRSP withdrawals or RRIF income). On top of that, there are no minimum withdrawals required in retirement like there are with RRSP’s (which turn into RRIF’s at age 71). These forced withdrawals may cause you to lose certain income tested credits or clawback of your Old Age Security. Another large consideration is the type of investments you have in your retirement vehicle and the way in which it is taxed. RRSP and RRIF withdrawals are taxed as if it is interest income, even if the inherent income was from capital gains. These capital gains in a non-registered account would only be taxed at 50% of the gain.
There are many other considerations when choosing the right retirement vehicle, the purpose of this article was to point out only a few. Please consult your tax professional when deciding which one makes sense for you.
submitted by Luc Joye, CPA, CA, Collins Barrow, Wellington-Dufferin.
