Personal Finance

dumb question: how to determine the best amount of RRSP to contribute??

  • Last Updated:
  • Feb 27th, 2018 5:21 pm
[OP]
Sr. Member
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Jan 21, 2017
912 posts
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dumb question: how to determine the best amount of RRSP to contribute??

how do you guys go about it? (FYI my tfsa is already maxed out)
37 replies
Deal Expert
Mar 25, 2005
21926 posts
2747 upvotes
Considering your income in the next few years (1-2, depending what kind of discount you apply), claim enough to lower your net income to whatever bracket you consider appropriate. Remember you can always contribute now and deduct in a future year.
Sr. Member
Jan 5, 2015
615 posts
165 upvotes
Edmonton, AB
Login into CRA, look up my contribution limit.
Contribute and claim max amount each year.
Sr. Member
Aug 20, 2015
514 posts
303 upvotes
Toronto
Are you planning to invest the money even if you don't contribute to the RRSP? If so contribute your maximum amount allowed. You can choose to defer your deductions to a future year depending on what tax brackets you want to be in.
Deal Addict
Apr 21, 2014
2266 posts
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Alberta
DPR2017 wrote: how do you guys go about it? (FYI my tfsa is already maxed out)
The typical RFD answer is max it out. I don’t if I did I’d have like 4-5 million when I retire which is wayyy too much for me. I’d rather enjoy some of that money now. What I do is calculate how much I want in retirement each month and based on that the rrsp calculators out there tell you what portfolio size you need to have. From there it will tell you how much you should contribute to get there. I do that plus a buffer. So if it says I need to put in 10k a year I put in 12k just as a buffer.
[OP]
Sr. Member
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Jan 21, 2017
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agreed. I too don't know if I want to max it out. want to save some $ for trips & other investments that are more flexible (even if it is cash account trading).

so the question is - how to choose the optimal amount? is it the least amount of RRSP that gets you down a tax bracket?

if so, anyone has a good resource on how marginal tax bracket works? To be be honest, I don't fully understand it, and looking at the ON/FED one, it is a massive range from 94 to 140k??
Newbie
Aug 5, 2015
27 posts
17 upvotes
New Westminster
DPR2017 wrote: agreed. I too don't know if I want to max it out. want to save some $ for trips & other investments that are more flexible (even if it is cash account trading).

so the question is - how to choose the optimal amount? is it the least amount of RRSP that gets you down a tax bracket?

if so, anyone has a good resource on how marginal tax bracket works? To be be honest, I don't fully understand it, and looking at the ON/FED one, it is a massive range from 94 to 140k??

Its not a dumb question.

You're onto the right track. Try to put enough in at your highest marginal rate.

Here is a good resource

https://www.taxtips.ca/marginaltaxrates.htm

If you're able to tell me your approx income and the Province you live in I can give you a specific amount. Im a CPA BTW
Sr. Member
Sep 23, 2013
512 posts
288 upvotes
Windsor, Ontario
A lot of great advice given already, one thing I'd also recommend is look at your monthly cash flow and budget. This will help with planning on how much money to put aside for retirement and trips in the future.
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Member
Dec 26, 2013
470 posts
159 upvotes
Ottawa
DPR2017 wrote:
if so, anyone has a good resource on how marginal tax bracket works? To be be honest, I don't fully understand it, and looking at the ON/FED one, it is a massive range from 94 to 140k??
It is a large combined Fed/Prov bracket, so is the jump in % from the next lower bracket, ~5%, i always contribute enough to get down below this bracket, this year its $93208. Dont forget OP to factor in other deductions like union dues or pension contributions when figuring out how much you need to contribute in rrsps to get your income down to the next tax bracket.
Deal Addict
User avatar
Dec 14, 2007
3102 posts
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Depends on how long you plan to live and plan to work.

Honestly, without knowing approximate income figures and province, it's hard to say.

But let's say Ontario:

Code: Select all

first $42,960			20.05%
over $42,960 up to $46,605	24.15%	+4.10	
over $46,605 up to $75,657	29.65%	+5.50
over $75,657 up to $85,923	31.48%	+1.83
over $85,923 up to $89,131	33.89%	+2.51
over $89,131 up to $93,208	37.91%	+4.02
over $93,208 up to $144,489	43.41%	+5.50
over $144,489 up to $150,000	46.41%	+3.00
over $150,000 up to $205,842	47.97%	+1.56
over $205,842 up to $220,000	51.97%	+3.00
over $220,000			53.53%	+1.56
As you can see, the biggest jumps are:
when you start to earn more than $46,605 ( 29.65% )
when you start to earn more than $89,131 ( 37.91% )
when you start to earn more than $93,208 ( 43.41% )

That jump after $93,000 is a pretty big one! IT's almost 10% more than money earned lower than $89,000. The jumps near the bottom are also pretty big, especially when considered in proportion to the cost of living... but chances are, a person making under $42,000 isn't focusing on their RRSP, especially if they're supporting a family. If you have a spouse that earns quite a bit less than you ( or vice-versa ), then have the LOWER income person pay all the bills ( or just pool all your money into a joint chequing account, it's easier and makes more sense ). Then the higher income person can do all the investing... or even contribute to a Spousal RRSP.

Also remember that if you can have a combined family income of less than $65,000 every dollar that you put into your RRSP generates a sizeable increase of EXTRA CCB for each child in your care*... So, that could factor into your equations if you have family income close to that (and have kids).

* For more information on that, there's a great thread about that.
I'd love to write history... in advance.
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Deal Addict
Mar 8, 2013
2717 posts
1413 upvotes
DPR2017 wrote: if so, anyone has a good resource on how marginal tax bracket works? To be be honest, I don't fully understand it, and looking at the ON/FED one, it is a massive range from 94 to 140k??
Think of marginal rate this way. There are a number of inputs to your income tax return that you cannot control - your employment income usually the main determining amount. So in Ontario 2018, if your taxable income after all automatic deductions is $93,208 you are at the bottom of the 43.41% tax bracket. So if you earn $100 extra in interest, you will pay $43.41 extra in taxes. You have until March 1, 2019 to decide if you should make an RRSP contribution. If you make an RRSP contribution for $100, you will reduce / offset that $100 extra interest, and save $43.41 in taxes. If you make an RRSP contribution for $200, then you will not save $43.41 x 2, but $43.41 + $37.91 because that second $100 will be at a lower marginal rate.

But the good news is that you are not required to claim all your contributions as deductions, but can carry them forward. So the common strategy, assuming that your income will rise in following years, is to claim $100 for 2018 and defer the second $100 to deduct in a future year to get the $43.41 tax savings benefit.

As for your original question, I prefer NOT to maximize my contributions and carry forward the deduction, because in my situation I cannot be sure of my future income. Similarly, I cannot be sure of income tax rates in the future. So I would rather keep that contribution and deduction room available for those years that I have unexpected high income. In those years, I would contribute and deduct down to the bottom of the highest tax bracket that I am likely to have in the future. At some point, I will be required to withdraw from my RSP/ RIF and claim the income at my marginal rate in the year of withdrawal.

Since you say you have already max'ed out your TFSA, the choice is simpler. If your income and marginal tax rate is likely to increase in the future, I think that you are better off investing outside the RSP for Canadian dividends and capital gains for now. Later on, when you have higher income, you can use that contribution and deduction room. What you want to avoid is deducting at a tax rate lower than the rate on withdrawal from an RSP.
[OP]
Sr. Member
User avatar
Jan 21, 2017
912 posts
293 upvotes
MikeD648 wrote: Its not a dumb question.

You're onto the right track. Try to put enough in at your highest marginal rate.

Here is a good resource

https://www.taxtips.ca/marginaltaxrates.htm

If you're able to tell me your approx income and the Province you live in I can give you a specific amount. Im a CPA BTW
Is day job income and rent income all bucketed under the same bracket?
Deal Addict
Jul 3, 2017
3860 posts
2787 upvotes
I always look at it this way: better to avoid tax now, in what are likely to be my high earning years, and hope to pay less in future when I take the money out after retirement. It's the most probable bet. If the opposite occurs, because I'm making more money than I expected in my retirement years, I'll count that as good fortune that outweighs my RRSP gamble that didn't pay off. :)

If you're still mid-career, and may be moving into a higher tax-bracket in future, I agree that you should check the rate steps for your province, and only use up as much contribution room as required to drop you to the first rate step that's significantly below your top marginal rate. That way you're saving that contribution room for a later year when your earnings are even higher.

Funny, I checked an 87-year-old relative's online tax status for them today, and the CRA is telling them that they have $10K contribution room in their RRSP this year. Huh? You can't contribute anything to an RRSP after age 71, and the CRA certainly knows their age. Where did this apparent misinformation come from?
Deal Addict
Sep 7, 2004
1595 posts
596 upvotes
Toronto
How does one defer their RRSP contributions to another year? Do you just not claim it until you need it? Lets say I contributed $5000 to my RRSP for 2017 but after doing some calculations realized that I'm going to be getting a refund. I know my 2018 year is going to be higher in income than 2017 so I want to use only $2500 of the contribution towards 2017. I'm only going to get one slip from the bank that says I contributed $5000. So how do I use only $2500?
Newbie
Aug 5, 2015
27 posts
17 upvotes
New Westminster
For personal income tax purposes yes. Employment income, and NET rental income (less allowable expenses) is all thrown into the same pool.
Deal Addict
Jul 3, 2017
3860 posts
2787 upvotes
gqbluez wrote: How does one defer their RRSP contributions to another year? Do you just not claim it until you need it? Lets say I contributed $5000 to my RRSP for 2017 but after doing some calculations realized that I'm going to be getting a refund. I know my 2018 year is going to be higher in income than 2017 so I want to use only $2500 of the contribution towards 2017. I'm only going to get one slip from the bank that says I contributed $5000. So how do I use only $2500?
You don't have to use all of your contribution limit, or any of it. Your unused contribution room accumulates year after year. Each year your cumulative available contribution room for next year is shown on your assessment.

If you make a contribution to your RRSP during March to December, it has to be less than your cumulative contribution limit, and you have to claim it on your tax return for that year. If it's January to February, you can decide whether you want to claim it for last year or the coming year.

One you claim it for a particular year, that's it, you can't change your mind.
Deal Addict
Mar 8, 2013
2717 posts
1413 upvotes
gqbluez wrote: How does one defer their RRSP contributions to another year? Do you just not claim it until you need it? Lets say I contributed $5000 to my RRSP for 2017 but after doing some calculations realized that I'm going to be getting a refund. I know my 2018 year is going to be higher in income than 2017 so I want to use only $2500 of the contribution towards 2017. I'm only going to get one slip from the bank that says I contributed $5000. So how do I use only $2500?
On Schedule 7, you should report all your contributions. On Line 14, enter the amount that you want to deduct, and the balance is automatically carried forward.
Deal Addict
Oct 29, 2010
4321 posts
670 upvotes
atomiton wrote: Depends on how long you plan to live and plan to work.

Honestly, without knowing approximate income figures and province, it's hard to say.

But let's say Ontario:

Code: Select all

first $42,960			20.05%
over $42,960 up to $46,605	24.15%	+4.10	
over $46,605 up to $75,657	29.65%	+5.50
over $75,657 up to $85,923	31.48%	+1.83
over $85,923 up to $89,131	33.89%	+2.51
over $89,131 up to $93,208	37.91%	+4.02
over $93,208 up to $144,489	43.41%	+5.50
over $144,489 up to $150,000	46.41%	+3.00
over $150,000 up to $205,842	47.97%	+1.56
over $205,842 up to $220,000	51.97%	+3.00
over $220,000			53.53%	+1.56
That's a really good analysis IMO.

I too came to the same conclusion, makes the most amount of sense to start using RRSP with every dollar above 93k, until then, just max out TFSA.

Still not sure why liberals believe TFSA is a tool for the rich and RRSP is a tool for the poor, seems the other way around if anything.
[OP]
Sr. Member
User avatar
Jan 21, 2017
912 posts
293 upvotes
atomiton wrote: Depends on how long you plan to live and plan to work.

Honestly, without knowing approximate income figures and province, it's hard to say.

But let's say Ontario:

Code: Select all

first $42,960			20.05%
over $42,960 up to $46,605	24.15%	+4.10	
over $46,605 up to $75,657	29.65%	+5.50
over $75,657 up to $85,923	31.48%	+1.83
over $85,923 up to $89,131	33.89%	+2.51
over $89,131 up to $93,208	37.91%	+4.02
over $93,208 up to $144,489	43.41%	+5.50
over $144,489 up to $150,000	46.41%	+3.00
over $150,000 up to $205,842	47.97%	+1.56
over $205,842 up to $220,000	51.97%	+3.00
over $220,000			53.53%	+1.56
As you can see, the biggest jumps are:
when you start to earn more than $46,605 ( 29.65% )
when you start to earn more than $89,131 ( 37.91% )
when you start to earn more than $93,208 ( 43.41% )

That jump after $93,000 is a pretty big one! IT's almost 10% more than money earned lower than $89,000. The jumps near the bottom are also pretty big, especially when considered in proportion to the cost of living... but chances are, a person making under $42,000 isn't focusing on their RRSP, especially if they're supporting a family. If you have a spouse that earns quite a bit less than you ( or vice-versa ), then have the LOWER income person pay all the bills ( or just pool all your money into a joint chequing account, it's easier and makes more sense ). Then the higher income person can do all the investing... or even contribute to a Spousal RRSP.

Also remember that if you can have a combined family income of less than $65,000 every dollar that you put into your RRSP generates a sizeable increase of EXTRA CCB for each child in your care*... So, that could factor into your equations if you have family income close to that (and have kids).

* For more information on that, there's a great thread about that.
so if I am over $93k but no where near $144k, should I be throwing every bit of RRSP room to bring the income down under $93k in that case?
Deal Addict
Oct 21, 2012
1412 posts
494 upvotes
Toronto
akaManny wrote:
But the good news is that you are not required to claim all your contributions as deductions, but can carry them forward. So the common strategy, assuming that your income will rise in following years, is to claim $100 for 2018 and defer the second $100 to deduct in a future year to get the $43.41 tax savings benefit.

As for your original question, I prefer NOT to maximize my contributions and carry forward the deduction, because in my situation I cannot be sure of my future income. Similarly, I cannot be sure of income tax rates in the future. So I would rather keep that contribution and deduction room available for those years that I have unexpected high income.
One on comment to this strategy is that you lose gains of the refund by carrying forward the contribution.

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