Feb 5, 2018
Personal Investor: RRSPs are great … if you’re rich
By Dale Jackson
It’s easy to get swept up in the rush to contribute to your registered retirement savings plan before the March first deadline. But RRSPs are not the best way to invest for everyone; and it all comes down to the rich getting richer.
There are three potential advantages of contributing to an RRSP. First, your contribution could result in a one-time refund. Second, you can reinvest the refund and the money can grow tax-free until it is withdrawn in retirement. Third, when it is withdrawn in retirement it could be taxed at a lower rate.
The third advantage, however, could backfire if the savings in your RRSP grow too much and withdrawals are taxed in a higher bracket. The problem could compound when the plan holder turns 71 years and minimum mandatory withdrawals are required when it is converted into a registered retirement income fund (RRIF). Too much money in a RIFF could also result in Old Age Security (OAS) claw backs.
Keeping that in mind, it’s important to find out how a contribution before this year’s deadline will be a benefit to you. There are several RRSP refund calculators out there but they generally use the Canada Revenue Agency Schedule 1 marginal tax rates. Here’s a simplified version using Ontario residents as an example. Rates vary from province to province and there is some overlap, so it takes some rounding off to make the point.
If your 2017 income is under $40,000, your marginal tax rate is about 20 per cent. That means for every $100 you contribute, you get a $20 refund.
If your income was between $45,000 and $90,000, your marginal tax rate is about 30 per cent. That means for every $100 you contribute, you get a $30 refund.
The marginal tax rate between $90,000 and $140,400 is 37 per cent, 41 per cent between $140,400 and $200,000, and about 46 per cent for anything above.
The tax refund for every $100 contributed by someone in the highest tax bracket is $46 – more than double the lowest tax bracket.
If you are in a lower tax bracket, a contribution to a tax free savings account is probably a better way to invest. There is no contribution deadline, and while you will not get an instant refund, the contribution and gains are never taxed.
Don’t worry about passing on an RRSP contribution this year. That allowable space will be carried forward to future years when, hopefully, you’re in a bigger tax bracket.
