In the first 60 days of the year, you can contribute to your RRSP and use the tax deduction on your prior year’s tax return. During that period, I often get the question: is it wise to contribute to an RRSP, or is it better to put that money in a TSFA? Ideally, you’ll want to contribute to both, however, the budget does not always allow for that to happen.
As such, I will pass along a few guidelines to help make the decision. To start, a quick review of the basics: RRSP stands for Registered Retirement Savings Plan and TSFA stands for Tax-Fee Savings Account. The RRSP offers a tax deduction for any money contributed to the account. This is a significant benefit, one not matched by the TFSA. One benefit of both the RRSP and the TFSA is that any money contributed to the account grows tax-free. Both RRSP and the TFSA limit the amount of money you can contribute. There is a formula based on the earnings from the previous year’s income that determines your RRSP room. For the TSFA, it is a fixed annual amount. In both cases, unused room carries forward. Unfortunately, when you withdraw funds from your RRSP, the money is regarded as taxable income, which is a drawback that a TFSA doesn’t have. As well, an RRSP must be converted to a Registered Retirement Income Fund (RRIF) by the end of the calendar when you turn 71. Once in an RRIF, the government mandates that every year a minimum amount of money must be withdrawn and those withdrawals are fully taxed. A TFSA does not have a forced conversion, you and hold a TFSA as long as you’d like to. In my view, one of the main benefits of the RRSP is the upfront tax deduction. The best time to contribute to your RRSP is when you are in a high tax bracket. Ideally, you would want to contribute to your RRSP when you are in a high tax bracket and withdraw funds when you’re in a lower tax bracket. A good example would be if you have a temporary increase in your taxable income. This could include the sale of a rental property, retirement payouts, the sale of a cottage, and a bonus from your employer – all of these events could create a one-time increase in your overall taxable income. In all of these cases, an RRSP contribution could ease up your tax burden. That money could be withdrawn down the road when you’re in a lower tax bracket. Also, for individuals who have a high income, regular RRSP contributions can provide significant tax savings. Generally, I often suggest an individual make an RRSP contribution if their income is above $74,416. At the moment, that level of income is the start of a tax bracket, above that level, the combined federal and provincial marginal tax rate is 37.90 per cent. With that level of income, every dollar you contribute saves you 37.9 cents of tax. That is a significant amount of savings. In addition, I usually recommend contributing enough to the RRSP to push your income into a lower tax bracket. As your taxable income declines, your marginal tax rate will also drop, meaning the tax saving of an RRSP contribution will lower and an RRSP contribution is less beneficial. So, RRSP contributions at lower income levels might not be worthwhile for you. Ideally, you want to contribute both to your TFSA and RRSP. If that isn’t possible, an RRSP contribution makes more sense if you earn a high income or if there is a temporary increase in your taxable income. In those cases, I often suggest contributing to an RRSP enough to lower your income by one tax bracket. However, if you’re not in one of these situations, it’s my opinion that a contribution to your TFSA would be better. It is important to mention that these are just guidelines and might not apply to your own unique financial situation. It is best to review your financial plan and see what the best fit is. CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability. Tax & Estate advice offered through Canaccord Genuity Wealth & Estate Planning |
AuthorClinton Orr is a Senior Wealth Advisor and Senior Portfolio Manager with Canaccord Genuity Corp. Archives
July 2023
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