Personal Finance

Trying to determine how much to contribute to RRSP

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  • Feb 27th, 2010 3:14 pm
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[OP]
Sr. Member
Dec 12, 2009
800 posts
101 upvotes
Nova Scotia

Trying to determine how much to contribute to RRSP

Okay, here's my situation:
  • I did not contribute to my RRSP over the last several years and have some room saved up. My 2009 limit is approximately $35,000
  • My net income for 2009 was $52,000
  • I have quite a bit of cash saved and have the flexibility to contribute all $35,000 if I wanted to do that
  • I am a resident of Nova Scotia
My initial thinking is that I should use my deduction limits over the next few years versus blowing it all in one year (eg, reducing my net income to around $30K for a few years versus reducing it to $17 one year) as I would get a larger return because my income over $30K is taxed at a higher rate.

Is my thinking sound? Or are there clear benefits that I'm missing to using all of my deduction limit if I'm in a position to do so?

Thanks.
19 replies
Deal Fanatic
Jul 1, 2007
8202 posts
1102 upvotes
I don't know what the NS provincial tax brackets are off hand, but know this:

On the first $11K or so you contribute you'll get 22 cents on the dollar back in your tax refund. Anything over that will get you 15 cents on the dollar back. Your income is currently around $11K into the 2nd federal tax bracket and if it stays at that level over the next couple years then it's advantageous to contribute 10-11K a year (all of it deducted at 22%) instead of doing all your contribution at once (2/3 of it only get 15% back).

Or... if you think your income will go up substantially more (over $80K) over the next couple years, save your contribution space until then.
[OP]
Sr. Member
Dec 12, 2009
800 posts
101 upvotes
Nova Scotia
Thanks. Here are the NS brackets:

8.79% on the first $29,590 of taxable income, +
14.95% on the next $29,590, +
16.67% on the next $33,820 +
17.5% on the amount over $93,000

I thought about taking your approach and aiming for the 40k federal bracket, but considering that I earn around 9k in contribution room every year I'd only be using around 2-3k from the extra pool I've stored up. Part of me is thinking I should aim for 29.5K as I don't think my income will be increasing substantially in the new few years.
Deal Expert
User avatar
Feb 9, 2003
17795 posts
2434 upvotes
Langley
You can contribute 35k all now and claim only 11k of deductions this year, and another 11k (rising with your salary if tax brackets stay the same) each year after.
[OP]
Sr. Member
Dec 12, 2009
800 posts
101 upvotes
Nova Scotia
Hm, so no one would recommend claiming ~23K or so this year to reduce my income to $29.5K? That would just be a waste?
Deal Addict
User avatar
May 2, 2004
1184 posts
53 upvotes
I think you can only claim the maximum nominal amount $21,000 for this year. Whether or not you should claim it all or some depends on what tax bracket you think you'll be in next year or in the future.
Member
Oct 24, 2001
419 posts
8 upvotes
Toronto
Thalo wrote:
Feb 27th, 2010 1:40 am
On the first $11K or so you contribute you'll get 22 cents on the dollar back in your tax refund. Anything over that will get you 15 cents on the dollar back.
Just out of curiosity, where are you getting that information from? I want to work the figures on my own situation and those figures would be helpful.
[OP]
Sr. Member
Dec 12, 2009
800 posts
101 upvotes
Nova Scotia
sully wrote:
Feb 27th, 2010 10:07 am
Just out of curiosity, where are you getting that information from? I want to work the figures on my own situation and those figures would be helpful.
Tax brackets: http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html

Income up to $40.7K is taxed at 15%. Income between $40.7K and $81.K is taxed at 22%.

So, in my case, my net income is $52K. Around $11K of that is taxed at 22% (federally).

Hope that helps.
[OP]
Sr. Member
Dec 12, 2009
800 posts
101 upvotes
Nova Scotia
Coolisme wrote:
Feb 27th, 2010 10:07 am
I think you can only claim the maximum nominal amount $21,000 for this year. Whether or not you should claim it all or some depends on what tax bracket you think you'll be in next year or in the future.
Can anyone else confirm? I thought the $21,000 figure was just the "cap". i.e., your contribution room for this year is the lower of either 18% of your net income or $21,000. But this doesn't take into account carried over room.

Or at least that's how I understood it...
[OP]
Sr. Member
Dec 12, 2009
800 posts
101 upvotes
Nova Scotia
Hm, I think I am missing something.

I just inputted some hypothetical scenarios into StudioTax.

If I contribute 11.5K to my RRSP and reduce my net income to 40.7K, my refund is going to be $3,175. That's 27.6 cents per dollar contributed.

If I contribute 22.5K to my RRSP and reduce my net income to 29.5K, my refund is going to be $6,499. That's 28.8 cents per dollar contributed.

This is the opposite result that I was expecting considering my income between 29.5K and 40.7K is not taxed as heavily. Why am I getting back more per dollar? o_O
Deal Addict
Jul 28, 2005
3237 posts
25 upvotes
Coolisme wrote:
Feb 27th, 2010 10:07 am
I think you can only claim the maximum nominal amount $21,000 for this year.
This is incorrect. You can claim up to the maximum of your deduction limit, which may be more than $21k for many people.
Deal Addict
Jul 28, 2005
3237 posts
25 upvotes
Dark0rb wrote:
Feb 27th, 2010 10:57 am
Hm, I think I am missing something.

I just inputted some hypothetical scenarios into StudioTax.

If I contribute 11.5K to my RRSP and reduce my net income to 40.7K, my refund is going to be $3,175. That's 27.6 cents per dollar contributed.

If I contribute 22.5K to my RRSP and reduce my net income to 29.5K, my refund is going to be $6,499. That's 28.8 cents per dollar contributed.

This is the opposite result that I was expecting considering my income between 29.5K and 40.7K is not taxed as heavily. Why am I getting back more per dollar? o_O
And if you contributed $0 to your RRSP, what would your refund be?

I think you are making a basic math mistake in assuming your entire refund is being caused by your RRSP deduction.
[OP]
Sr. Member
Dec 12, 2009
800 posts
101 upvotes
Nova Scotia
asdfvcx wrote:
Feb 27th, 2010 11:01 am
And if you contributed $0 to your RRSP, what would your refund be?

I think you are making a basic math mistake in assuming your entire refund is being caused by your RRSP deduction.
If I contributed nothing I would actually owe $1,055. :)
Deal Addict
Jul 28, 2005
3237 posts
25 upvotes
And to answer the OP's original question, you are going about this the wrong way.

An RRSP is primarily a vehicle for saving for retirement, not saving for taxes.

  • You need to first determine how much money you should be saving for retirement to meet your goals in retirement.
  • Then you need to determine your desired asset allocation to meet your goals.
  • And finally you should decide the best way to distribute your investments between RRSP, TFSA, and non-registered investments.

I could be wrong, but you seem to be jumping right to the last step. Getting the maximum tax savings is the least important step, not the most important.
Deal Addict
Jul 28, 2005
3237 posts
25 upvotes
Dark0rb wrote:
Feb 27th, 2010 11:06 am
If I contributed nothing I would actually owe $1,055. :)
Then that would seem to indicate that your first $11.5k contribution to your RRSP is saving you $4230 in taxes. (In case you haven't already figured that out).

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