Retirement Saving Plans: should you contribute to an RRSP

Over the past decade or so, the government has introduced a number of new savings vehicles and made enhancements to existing ones. Obviously having more options is a positive thing, but with choice comes decisions and complexity. And indeed, having more options has made the decision of which type of account to use for your retirement savings much more complicated.

Something that hasn’t changed over the past decade or so is the deadline for Registered Retirement Savings Plan (RRSP) contributions, which is still 60 days after the beginning of the following year. So, while there’s still time to decide where to put extra savings this year, it is limited time. The deadline for the 2022 tax year is March 1, 2023.

“…but at the age of fifty, they must retire from their regular service and work no longer.”

Numbers 8:25 (NIV)

And now we come to this month’s question: should you contribute to an RRSP? For most working individuals, that answer is probably yes. However, that’s not always the case.

Don’t get me wrong. As you can probably tell from my email address (dr.rrsp@visionvest.ca), I love RRSPs. They remain among the most effective and flexible retirement savings options available, but they aren’t right for every situation.

In 2023, the First Home Savings Accounts (see Ben’s article from last month) will be the go-to for many. Sadly, they are not yet available (although they are expected to be available in April if everything goes well at the House of Commons), so they’re out as an option at this time. A quick refresher on RRSPs. Money contributed to an RRSP is deducted from your income, so you save tax on the contribution, but it is taxed upon withdrawal. So, at the end of the day, it is primarily a deferral of tax. This deferral may lead to additional tax savings or additional tax paid as it’s likely that you will be in a different tax bracket at the time of withdrawal, which is typically when you retire. 

Consider the main rule of thumb for contributing to an RRSP:  if you expect to be in a lower tax bracket in retirement, the RRSP is almost certainly the right vehicle for you. So now that we’ve gone over the basics, let’s look at some actual dollar amounts.

I’m going to keep it simple here and go with federal income tax brackets only (1). If you earned over $221,708 in 2022, then the question of which account to use is a no-brainer. You are in the highest tax bracket there is. You should be placing a very high priority on maximizing RRSP contributions.

If you earned between $155,625 and $221,708, it’s also highly likely that you should contribute to your RRSP, but are you likely to be in a lower tax bracket when taking the money out? The odds are high, but you know your situation. I don’t.

In my experience, even those in the next bracket down (earning between $100,392 and $155,625) usually do well with an RRSP.

The most challenging bracket (and the one where the majority of people fall into) is the $50,197 to $100,392 income category. They’re not in a high tax bracket, but neither is it a low one. In order to determine where they should put their savings, there are a few questions we consider no matter what bracket someone is in. This is more difficult in this bracket because it’s easy for someone’s income to jump above or below the threshold.

What sort of advancement opportunities do they have at work? Are they going to inherit? Are they able to save so much that their retirement income may exceed their current income? Are they married? And if so, what is their spouse’s income? What will be the future impact of income splitting in retirement?

For the lowest bracket (those who earned less than $50,197) a TFSA is probably a better deal. Why? Because it’s likely (not guaranteed, mind you) that they will be at the same or a higher tax rate in retirement. However, if your employer is matching RRSP contributions instead of TFSAs, then the focus should probably still be the RRSP. It depends on how much is matched.

Keep in mind, in these examples I’ve restricted myself to looking at federal brackets only. To make things even more complicated, the decision becomes even more nuanced and often not as clear when taking into account the provincial brackets as well (which should definitely be done).

At the end of the day, saving more is better than saving less. If you can save while also taking the greatest tax advantages possible, that’s what will get you the farthest ahead, but doing so requires attempting to forecast future earnings and future tax brackets. Of course, it’s going to be your best guess, but it’s a worthwhile exercise. Sometimes we can be fairly confident in our projections. Sometimes it’s more difficult. An employee in a job with little advancement potential and clearly defined salary criteria is more likely to follow a stable income trajectory than an entrepreneur who may make very little in the early years, only to make it up in spades later on.

After you’ve done that little time-travelling exercise, let’s come back to 2023. You have until March 1 to decide on whether you’ll be contributing to an RRSP this year. That’s only a few short weeks away. Professional advice can be helpful, but you know your personal situation better than any advisor.

Consider the factors I’ve mentioned and think about whether you are likely to be in a higher, lower, or the same tax bracket in retirement and then make the decision of where to put your money accordingly, either on your own or with the help of a professional.

Sources:

1. Canada Taxes 2022: Federal Tax Brackets, Rates and Credits: https://turbotax.intuit.ca/tips/an-overview-of-federal-tax-rates-286

Arnold Machel, CFP® lives, works, and worships in the White Rock/South Surrey area. He is a Certified Financial Planner with IPC Investment Corporation and Visionvest Financial Planning & Services. In 2022 he was named as one of BCs Top Wealth Advisors by The Globe & Mail, and Visionvest (his firm) has been voted Best Investment/Financial Advisor by Peace Arch News readers for the past two years in a row. 

Questions and comments can be directed to him at dr.rrsp@visionvest.ca or through his website at www.visionvest.ca. Please note that all comments are of a general nature and should not be relied upon as individual advice. The views and opinions expressed in this commentary are those of Arnold Machel and may not necessarily reflect those of IPC Investment Corporation. While every attempt is made to ensure accuracy, facts and figures are not guaranteed.