When to Make an RRSP Contribution
The Registered Retirement Savings Plan (RRSP) was once a very popular savings tool. The Tax-Free Savings Account (TFSA) offers multiple benefits and is a great way to build wealth. The RRSP still has some merit, however. For example, the RRSP offers a tax deduction for any money contributed to the account. That is a significant benefit, one that isn’t matched by the TFSA. Both the RRSP and TFSA allow any money contributed to grow tax-free over time. Unfortunately, when you withdraw funds from your RRSP the money is treated as taxable income, which is a drawback the TFSA doesn’t have. In my view, one of the main benefits offered by the RRSP is the upfront tax deduction.
There are situations where upfront tax deductions can lead to genuine tax savings. Before we review the tax-saving scenarios, it’s important to note the amount you’re allowed to contribute. There’s a general formula that determines your RRSP contribution. For the 2022 tax year you can contribute 18 per cent of your earned income up to $29,210. Earned income is money derived from a job or self-employment, while income from investments, pensions, or government benefits isn’t considered earned income. In addition, many people have a pension plan through their employer. The contributions to your workplace pension plan will, unfortunately, reduce your RRSP contribution room. If you don’t use your full RRSP room in a year, it rolls over to the next year. The easiest way to see how much RRSP contribution room you have is to check your Notice of Assessment. After you file your taxes, you receive a Notice of Assessment that will list your contribution room.
Assuming you have an RRSP room, the best time to contribute is when you are in a higher tax bracket. Ideally, you want to contribute to your RRSP when you are in a higher tax bracket and withdraw the funds when you’re in a lower tax bracket.
An example would be if you sell a property that isn’t your principal residence. Selling the property could create a taxable capital gain that would increase your income for that year. An RRSP contribution in the year of sale would ease your tax burden for the year. That money could be withdrawn later down the road when you’re in a lower tax bracket. Also, for individuals with a high income, regular RRSP contributions can provide significant tax savings.
Typically, I recommend contributing enough to the RRSP to push your income into a lower tax bracket. As your taxable income declines, your marginal tax rate also drops. This means the tax savings of an RRSP contribution will also be lower, and an RRSP contribution is less beneficial. So, RRSP contributions at lower income levels might now be worthwhile. You are permitted to contribute up to 60 days into the next calendar year and use the deduction on the prior year’s tax return. Often that means folks can contribute in January or February and get the tax deduction on the prior year’s tax return. As mentioned, there are scenarios where an RRSP contribution is beneficial. Talk to your tax professional to see if an RRSP contribution would make sense for your and your financial goals.
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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.
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