Personal Finance

RRSP vs. TFSA Contributions - High Income

  • Last Updated:
  • Mar 2nd, 2018 9:00 pm
[OP]
Newbie
Feb 25, 2018
66 posts

RRSP vs. TFSA Contributions - High Income

Hello everyone!

Need some support here. My net income with spouse is approx. $200k this year and I need to understand if it make sense to do a RRSP contribution at this income level for tax return purposes or should I just put all my savings into TFSA?

I have contributed to my RRSP in the past when our income was lower, but I have plenty of cap room and have not maximized the RRSPs nor the TFSAs

I find that at this income level, the greater the RRSP contribution I make, the amount of tax return doesn't really increase that much therefore it doesn't seem to make sense to do a contribution. Does this make sense?
39 replies
Deal Guru
User avatar
Nov 19, 2002
12066 posts
450 upvotes
I'm trying to understand what you're saying here. You feel that at a HIGHER income level a larger RRSP contribution makes LESS of a difference? So you contributed when you were lower income but you're thinking of not doing it now?

If that is the case, you have it exactly backwards. The deferment you receive from RRSP contributions is at your marginal tax rate, so the higher your income level, the greater potential return, and the greater the likelihood that your current marginal rate may be higher than your marginal rate when you're withdrawing from your RRSP. Have you run a calculation on your current tax return?
[OP]
Newbie
Feb 25, 2018
66 posts
deep wrote: I'm trying to understand what you're saying here. You feel that at a HIGHER income level a larger RRSP contribution makes LESS of a difference? So you contributed when you were lower income but you're thinking of not doing it now?

If that is the case, you have it exactly backwards. The deferment you receive from RRSP contributions is at your marginal tax rate, so the higher your income level, the greater potential return, and the greater the likelihood that your current marginal rate may be higher than your marginal rate when you're withdrawing from your RRSP. Have you run a calculation on your current tax return?
Yes I ran a a calculation on a tax software and the numbers were like this for example:
Untitled.png

If I were to contribute ~$20k I would get $11725 refund...

My income level and current marginal rate will probably be the same for the next couple of years. I don't have alot of free cash to maximize out my RRSP cap room, but are you saying I should put as much as I can? Should I move all TFSA money to RRSP and just focus on that?
Deal Expert
Aug 22, 2011
35652 posts
21738 upvotes
Center of Universe
Yes, you want to contribute into RRSP to lower your tax bracket.
TFSA is also great for sheltering your earnings from investment returns.
Deal Addict
User avatar
Aug 1, 2007
1427 posts
218 upvotes
You could do both - contribute to RRSP and then put the refund in the TFSA.

Contributing to an RRSP makes sense when your current income is higher than your expected income in retirement. The marginal benefit of RSP contributions goes down when it pushes you into lower tax brackets.
Deal Addict
User avatar
May 11, 2014
4660 posts
5594 upvotes
Iqaluit, NU
Another key thing to consider is whether your income between you and your spouse is different. If this difference is significant, the spousal RRSP would be something you should consider. If let's say you make $150k and the spouse made $50k, the income tax rate you pay would be higher than the spouse. If so, you can use your spouse's RRSP contribution room by making a spousal contribution into the spouse's account and then claiming the RRSP deduction.
By doing so, the deduction results a higher income tax return as your tax rate would be higher
.and gives you a better chance to lower your future income tax rate as it will equal out the future RRIF income (as it should be lower as it is shared).

NOTE Sorry I was thinking this wrong. It is still your contribution room, however, by electing to split it in this matter, you will reduce your tax burden during retirement by lowering your potential income and increasing your spouses and should result in a lower overall income tax rate
Last edited by xgbsSS on Feb 27th, 2018 9:38 pm, edited 1 time in total.
Support your local Credit Union!

Sask Pension Plan Upto $6600/yr in Credit Card spending on RRSP contributions
http://forums.redflagdeals.com/sask-pen ... ns-2167222
[OP]
Newbie
Feb 25, 2018
66 posts
xgbsSS wrote: Another key thing to consider is whether your income between you and your spouse is different. If this difference is significant, the spousal RRSP would be something you should consider. If let's say you make $150k and the spouse made $50k, the income tax rate you pay would be higher than the spouse. If so, you can use your spouse's RRSP contribution room by making a spousal contribution into the spouse's account and then claiming the RRSP deduction. By doing so, the deduction results a higher income tax return as your tax rate would be higher and gives you a better chance to lower your future income tax rate as it will equal out the future RRIF income (as it should be lower as it is shared).
This is exactly the case between me an my spouse.

Since I don't have time to open a spousal RRSP tomorrow, should I max out my RRSP room first and then put whatever I can into my spouse's regular RRSP?
Deal Fanatic
Feb 4, 2015
6797 posts
3086 upvotes
Canada, Eh!!
xgbsSS wrote: Another key thing to consider is whether your income between you and your spouse is different. If this difference is significant, the spousal RRSP would be something you should consider. If let's say you make $150k and the spouse made $50k, the income tax rate you pay would be higher than the spouse. If so, you can use your spouse's RRSP contribution room by making a spousal contribution into the spouse's account and then claiming the RRSP deduction. By doing so, the deduction results a higher income tax return as your tax rate would be higher and gives you a better chance to lower your future income tax rate as it will equal out the future RRIF income (as it should be lower as it is shared).
Wouldn't a spousal contribution be based on the higher earning spouse's contribution room or did I read/understand wrong?

So following your example... spouse earning 150k would use their rrsp contribution room and make contribution to rrsp of spouse earning 50k? The deduction would go to spouse earning 150k. In other words... the lower earning spouse could have 0 rrsp contribution room but still have a contribution made to their rrsp from higher earning spouse who does have rrsp contribution room.
.......
July 13, 2017 to October 25, 2018: BOC raised rates 5 times and MCAP raised its prime rate next day each time.

2020: BOC dropped rates 3 times and MCAP waited and waited to drop its prime rate to include all 3 drops.
Deal Addict
User avatar
May 11, 2014
4660 posts
5594 upvotes
Iqaluit, NU
georvu wrote: Wouldn't a spousal contribution be based on the higher earning spouse's contribution room or did I read/understand wrong?

So following your example... spouse earning 150k would use their rrsp contribution room and make contribution to rrsp of spouse earning 50k? The deduction would go to spouse earning 150k. In other words... the lower earning spouse could have 0 rrsp contribution room but still have a contribution made to their rrsp from higher earning spouse who does have rrsp contribution room.
Sorry, I wrote that wrong. Being a single person myself, I'm not the most versed with it ;)

you are correct! It is based on the contributor's room.
Support your local Credit Union!

Sask Pension Plan Upto $6600/yr in Credit Card spending on RRSP contributions
http://forums.redflagdeals.com/sask-pen ... ns-2167222
Deal Addict
User avatar
May 11, 2014
4660 posts
5594 upvotes
Iqaluit, NU
raptors64 wrote: This is exactly the case between me an my spouse.

Since I don't have time to open a spousal RRSP tomorrow, should I max out my RRSP room first and then put whatever I can into my spouse's regular RRSP?
Sorry I had misinformed you. The Spousal RRSP is based on your(the contributor's) RRSP room.

Probably, using your RRSP room for yourself makes sense, unless you feel that waiting until next year to potentially lower your own future income and to increase your spouse's makes more sense. You need to decide the pro and con of getting a bigger tax return this year (getting the money 1 year earlier), vs the potentially income tax savings of attributing more of the future income to your spouse next year with adding a larger RRSP contribution to the spousal RRSP. For your spouse's contribution, depending how much lower his/her income is, you might want to prioritize the TFSA before the RRSP.

If you have time, technically the last day this year is March 1st should you be able to find somewhere willing to open a Spousal RRSP on the fly and take your contribution immediately. Sask Pension which I personally use allows you to make spousal or individual contributions on the same account. You can make a contribution with credit card so you do not have to wait for contributions to clear via banking etc. They do everything remotely so they might be able to help you on the fly. Mind you, max is $6000 so not sure if this can help you. Maybe try calling them and they might be able to open an account immediately.
Support your local Credit Union!

Sask Pension Plan Upto $6600/yr in Credit Card spending on RRSP contributions
http://forums.redflagdeals.com/sask-pen ... ns-2167222
Deal Addict
User avatar
Jul 13, 2014
4343 posts
1839 upvotes
Parry Sound
TFSA:
- pay tax now
- withdraw without penalty

RRSP:
- pay tax later
- withdraw with penalty
This message has been approved by the Office of the Mayor of Toronto.
Jr. Member
Aug 17, 2011
169 posts
130 upvotes
TORONTO
OP do you have kids?

Putting aside the question of whether to put money into your rrsp or spousal rrsp, if you have kids then lowering your+spouse total net income by making an rrsp contribution will increase the amount of child benefit you get from govt (i.e free money).

I’m scrambling to get this done right now and injecting a chunk into both my rrsp and spousal rrsp because if I don’t then we will get zero child benefit payment...this is the year to do it for me bc wifey was on mat leave for most of 2017, when she goes back to work we will get zero under the current child benefit structure based on our combined income.

If you don’t have kids but planning, this is something to keep in mind as well...maximize rrsp contribution for the tax year when one spouse is on leave to minimize net income = more child benefit entitlement.

Also, slightly off topic, but one advantage of the the spousal rrsp is that three years after you stop contributing to it, your spouse can take the money out of the spousal rrsp and it gets counted towards their own income and therefore taxed at their own marginal rate...if you can plan it so this occurs while the spouse is on a parental leave then you’ve saved yourself some tax money. E.g. your marginal rate is 50%, you contribute $10k to spousal rrsp and you will get back $5k refund for that tax year. Spouse takes that $10k out 3yrs later, and assume their marginal rate at the time is 20%, spouse has to pay $2k in tax for that year. Net it out and your family has just saved $3k in taxes. I believe that for this type of thing to work, the contributions to the spousal rrsp has to have stopped and then 3yrs go by (i.e. there’s no first in first out type principle in play).
[OP]
Newbie
Feb 25, 2018
66 posts
willdaman wrote: OP do you have kids?

Putting aside the question of whether to put money into your rrsp or spousal rrsp, if you have kids then lowering your+spouse total net income by making an rrsp contribution will increase the amount of child benefit you get from govt (i.e free money).

I’m scrambling to get this done right now and injecting a chunk into both my rrsp and spousal rrsp because if I don’t then we will get zero child benefit payment...this is the year to do it for me bc wifey was on mat leave for most of 2017, when she goes back to work we will get zero under the current child benefit structure based on our combined income.

If you don’t have kids but planning, this is something to keep in mind as well...maximize rrsp contribution for the tax year when one spouse is on leave to minimize net income = more child benefit entitlement.

Also, slightly off topic, but one advantage of the the spousal rrsp is that three years after you stop contributing to it, your spouse can take the money out of the spousal rrsp and it gets counted towards their own income and therefore taxed at their own marginal rate...if you can plan it so this occurs while the spouse is on a parental leave then you’ve saved yourself some tax money. E.g. your marginal rate is 50%, you contribute $10k to spousal rrsp and you will get back $5k refund for that tax year. Spouse takes that $10k out 3yrs later, and assume their marginal rate at the time is 20%, spouse has to pay $2k in tax for that year. Net it out and your family has just saved $3k in taxes. I believe that for this type of thing to work, the contributions to the spousal rrsp has to have stopped and then 3yrs go by (i.e. there’s no first in first out type principle in play).
Planning to have one this year. Wife will go on leave from 2018 to 2019, with the majority of the leave being in 2019. herefore should I maximize my RRSP contribution next year for the 2018 or 2019 tax year?
[OP]
Newbie
Feb 25, 2018
66 posts
xgbsSS wrote: Sorry I had misinformed you. The Spousal RRSP is based on your(the contributor's) RRSP room.

Probably, using your RRSP room for yourself makes sense, unless you feel that waiting until next year to potentially lower your own future income and to increase your spouse's makes more sense. You need to decide the pro and con of getting a bigger tax return this year (getting the money 1 year earlier), vs the potentially income tax savings of attributing more of the future income to your spouse next year with adding a larger RRSP contribution to the spousal RRSP. For your spouse's contribution, depending how much lower his/her income is, you might want to prioritize the TFSA before the RRSP.

If you have time, technically the last day this year is March 1st should you be able to find somewhere willing to open a Spousal RRSP on the fly and take your contribution immediately. Sask Pension which I personally use allows you to make spousal or individual contributions on the same account. You can make a contribution with credit card so you do not have to wait for contributions to clear via banking etc. They do everything remotely so they might be able to help you on the fly. Mind you, max is $6000 so not sure if this can help you. Maybe try calling them and they might be able to open an account immediately.
Sorry I dont understand our 2nd paragraph after VS.....can you please elaborate?
Deal Addict
Feb 21, 2004
1461 posts
220 upvotes
Montreal
EVERY situation differs but GENERALLY speaking,

High income = Best to max RRSP first, then TFSA after
Low-Mid Income = TFSA First, RRSP later

In the low-mid income scenario, if you THINK your income will be significantly higher in the new couple of years, it becomes even better to do TFSA first, then RRSP after.
Deal Addict
User avatar
May 11, 2014
4660 posts
5594 upvotes
Iqaluit, NU
raptors64 wrote: Sorry I dont understand our 2nd paragraph after VS.....can you please elaborate?
So, you are aware that with RRSPs that when you retire and start drawing from them, you pay income tax? Because of that, it is sometimes wise not to overfund them. When you have a situation where you and your spouse have a large gap in your incomes, it is fair to say your RRSPs will likely be different in value as well. If your RRSP is very large vs your spouse's, you are likely going to have to draw more money each year. Since each dollar drawn is treated like income, you may run into the problem of having to pay a higher income tax rate.

Because of that, if you were to rather fund your spousal RRSP to help even out the gap, you can help mitigate this future tax liability. By equalIng out your RRSP balances, you have a bit more flexibility drawing from them. You are not forced to overdraw some years triggering a higher tax rate. Your income tax rate will be lowered and likely you and your spouse will pay less taxes overall.

What I am getting at is whether it may be more beneficial for you to either
1) Get that income tax return 1 year earlier (this tax return)

vs

2)Overall income tax savings at retirement by opening the spousal RRSP and start contributing toward it (which will likely happen on next year's taxes since you have very little time to open an account).
Support your local Credit Union!

Sask Pension Plan Upto $6600/yr in Credit Card spending on RRSP contributions
http://forums.redflagdeals.com/sask-pen ... ns-2167222
Jr. Member
Aug 17, 2011
169 posts
130 upvotes
TORONTO
raptors64 wrote: Planning to have one this year. Wife will go on leave from 2018 to 2019, with the majority of the leave being in 2019. herefore should I maximize my RRSP contribution next year for the 2018 or 2019 tax year?
If the majority of mat leave will be in 2019, then you’ll get the most impact out of a big rrsp deduction for the 2019 tax year to bring your net family income to as low as possible. Of course if your wife gets ei and a salary top up at work, might not make a big of an impact as you would like.
Deal Expert
Aug 22, 2011
35652 posts
21738 upvotes
Center of Universe
willdaman wrote: If the majority of mat leave will be in 2019, then you’ll get the most impact out of a big rrsp deduction for the 2019 tax year to bring your net family income to as low as possible. Of course if your wife gets ei and a salary top up at work, might not make a big of an impact as you would like.
That's now how it works.
[OP]
Newbie
Feb 25, 2018
66 posts
Thanks everyone.

I have decided to do maximize my RRSP this year and take the tax return and put into mine and spouse TFSA. Sure I could maybe get a bigger tax return for the 2019 tax return if my spouse is on mat leave then, but in my opinion, money today invested would be worth more than money in 2020.

Then later this year I will open a spousal RRSP and transfer some of my RRSP there to balance it out, so my spouse will be able to withdraw from it during mat leave.

Top