Timing Your RRSP Deduction

Active lifelong tax planning can greatly reduce the amount of personal income tax you pay throughout your lifetime, and upon your death.

All income is subject to income tax (please refer to the article: Why you have to pay income tax). The Canadian personal income tax system is a graduated system, meaning that the lowest rate of tax 20% applies to the first $50,000 of income, 30% applies to income between $50,000 and $100,000 and 35% between $100,000 and $150,000 (for simplicity sake, these tax rates are Federal and Provincial tax rates combined, and rounded to the nearest 5%, and the income is rounded to the nearest $50,000).

A number of strategies can be used to reduce taxable income. Today we will discuss RRSP contributions and when to claim the deduction.

Registered Retirement Savings Plan (RRSP) contributions are deductible from income and result in tax savings relative to the tax bracket. Someone earning under $50,000 in the 20% tax bracket will save 20% of the amount of their RRSP contribution in reduced taxes. Compare this to saving 30% if they fall in the next higher tax bracket of income above $50,000.

A quick example to apply this principal in practical terms:
Someone is currently earning $45,000 and puts $1,000 into an RRSP if they claim the deduction, they will save 20% or $200 in reduced taxes. But they know they are moving into a new position and will soon be earning $55,000. If they make the RRSP contribution in the year in which they report the $55,000 of income, the tax savings will be 30% of the $1000 deduction. A contribution can be made one year and deducted in a future year if the taxpayer knows they will be moving into a higher tax bracket in the future.  

RRSP withdrawals are taxable, so it is also important to consider what tax bracket you will be in when you make the withdrawal. Most people do have lower income in retirement, which means they either will be in the same or a lower tax bracket once they retire. Therefore, an RRSP contribution claimed at a 30 or 40% deduction rate might be taxed at the 20% tax rate during retirement. The difference in tax rates is one of the advantages of contributing to an RRSP while working.

A financial planner who knows your personal situation can help analyse and guide you with respect to tax planning. The information given in this tax planning article is not intended to provide individual advice and you should consider your own situation before taking any actions.

We hope you will find this information valuable and will increase your financial confidence. You can always find these articles on our website anytime at www.actionfinancialgroup.com.  

Karin Rimnyak, Certified Financial Planner®
Investment Advisor
Insurance Advisor, Action Financial Group Ltd.

David Dryburgh, Certified Financial Planner­®
Investment Advisor

Insurance Advisor, Action Financial Group Ltd.

Ian Barrie, Certified Financial Planner®
Investment Advisor

Insurance Advisor, Action Financial Group Ltd.

This information has been prepared by Karin Rimnyak who is an investment Advisor for iA Private Wealth. Opinions expressed in this email are those of the Investment Advisor only and do not necessarily reflect those of iA Private Wealth. iA private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.