By Jamie Golombek, Managing Director, Tax and Estate Planning, CIBC Private Wealth Management.
Most Canadians have the ability to contribute something to an RRSP this season. But that doesn’t mean they should. The decision to contribute in a particular year should be based on your personal circumstances, including your tax bracket today and your expected tax bracket in the future, specifically, the year of withdrawal.
If your teen earns money through part-time or summer jobs, you should encourage them to file a tax return, creating RRSP contribution room. They can then choose to either make an RRSP contribution right away or save the RRSP deduction for the future and claim it in a year when they would otherwise owe taxes, perhaps in their twenties or thirties. That being said, since a teen likely won’t pay any tax due to her low earnings, it probably doesn’t matter whether she contributes to an RRSP right away or simply saves the money in a non-registered account, since any earnings or gains will likely escape tax due to the basic personal amount. Note that a TFSA is not an option for teens until they reach age 18, the minimum age requirement under the tax rules to establish a TFSA.
Once you’ve started earning income and become subject to tax, you need to decide whether it makes sense to contribute to an RRSP or a TFSA. The general rule is that if your tax bracket today is low and you expect to be in a higher tax bracket later on when the funds are taken out, you’re better off maxing out your TFSA before contributing to an RRSP. That’s why my general advice for those in their twenties is that if your income is under about $40,000 annually, stick with TFSA contributions and save the RRSP room, contribution and deduction for the future, when you’ll be in a higher tax bracket.
Thirties to Sixties
For middle income to upper income earners, which demographically fall in the broad age range of 30 to 70, my general rule is to maximize RRSP contributions since your tax rate when you are working is typically higher than it will be when you retire and your income is lower.
Seventies and up
If you are over age 71, while you can no longer contribute to your own RRSP, you can still contribute to a spousal RRSP if your spouse or partner is 71 or under. This would only be applicable if you have unused RRSP contribution room, either because you haven’t contributed the maximum allowed during your working years or you continue to generate new contribution room annually from employment or rental income.
This article first appeared in the Financial Post in January, 2014. Used by permission of author.
Tip Sheet – Make The Most of Your RRSP
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