So it is “RRSP time” again; the time of year when you see lots of advertisements and maybe get some calls from your banker or financial advisor asking for your RRSP contribution by March 1.
How do you know if you should or should not?
Let’s start with who should be buying an RRSP. And remember the tax savings on buying RRSPs are a tax deferral. The tax refund you may get is only temporary. You will pay tax on them some other time in the future.
Those of you who have company sponsored RRSP or pension plans that have a matching program (you put in so much and your employer matches so much) should definitely be maximizing what you can. You want to get the most the employer will match. It’s free money; you definitely want to take advantage of it!
If your taxable income is fairly high (over $41,000) you should probably buy an RRSP (but only enough to reduce your income to $41,000). From $41,000 to about $67,000 you are in a 35% tax bracket; you save 35% in taxes for the amount of RRSPs you buy (I should say you “defer” the taxes). The top bracket is taxable income over $127,000; those individuals would save more than 46% taxes. If you are anywhere over $67,000 you probably should be buying an RRSP.
If you notice some hesitation in my words, it’s because RRSPs still may not make sense for everyone even if your income is over $41,000.
It also depends on how much taxes you’ll pay when you take them out. Of course that’s hard to know today. But if you are 55+ and closer to retirement, it’s a bit easier for a tax professional like myself to estimate what your income and the taxes will be once you are 65+. If you end up taking out the RRSPs at the same or higher tax bracket, it’s likely not a good idea to buy them today; you are likely losing some other tax credits at 65+ too.
If you are under 55 and have income more than $41,000 then buying an RRSP likely makes sense. If you are over 55, get some retirement income projections and some advice first.
Are Spousal RRSPs still a good idea?
First, let’s review Spousal RRSPs. It allows one spouse in a higher tax bracket to buy an RRSP and get a tax deduction, but the RRSP is in the name of the other spouse who will withdraw it in the future (hopefully at retirement time) and at a lower tax bracket.
With the Pension Income Splitting allowed on tax returns, it’s not quite as crucial as it used to be for those families that are expecting a company pension plan. But for the 2/3 of the rest of the population (including me!) who do not have a company pension plan, Spousal RRSPs may be a good idea to split future income during retirement before both of you are age 65. Again this is ideal for spouses who have quite different levels of taxable income now and at retirement.
So for those of you who I’ve indicated maybe should not be buying an RRSP (your income is under $41,000), how should you be saving for your future? Well, since 2009, the new TFSA (Tax Free Savings Account) has become a great place for everyone else who wants to save some money for the future, but either should not or cannot buy RRSPs.
Of course if you have some high interest rates on some of your debts, you should probably tackle those first. Either get them paid off as soon as possible, or get them converted to a lower interest rate by asking for a lower interest rate on your credit card (yes you can ask them!) or transferring the balance to a lower rate card or credit line or other debt.
What about RRSP loans? I consider them a forced type of RRSP savings. If you do have a high income, but no cash to put into the RRSP by March 1, an RRSP loan may be an option. First only buy what you can pay off in the next 12 months; so you have cash flow again a year from now. If and when you get your Tax Refund, put it against that RRSP loan (or another loan that has a higher interest rate) so you can get it paid off sooner. And then you can take that same payment you’ve been used to and put it in a monthly RRSP to get started on your 2011 RRSP contribution.
Anni Markmann is an independent financial planner and tax professional working, living, playing, and volunteering in our community. Contact her at 422-6631 or email@example.com or at 36 Dawson Road in Ste Anne.