February 7, 2023 by David Christianson
There may still be time to reduce your taxes payable for 2022, depending on your situation.
I’m talking about making an allowable RRSP contribution within 60 days of the year-end. If you have contribution room, then such a contribution can be deducted from your taxable income on your 2022 tax return.
To find out if you have contribution room, check your 2021 CRA Notice of Assessment. Your 2022 limit is based on your “earned” income from 2021, plus any unused contribution room carried forward.
Ah, that’s the question… And I will give the usual financial planner’s answer, “It depends”.
Broad strokes is that a contribution now reduces your taxable income and therefore reduces your income taxes payable by the percentage of your marginal tax rate, or MTR.
In plain language, that means if your taxable income is, say, $85,000 in 2022, a $1,000 RRSP contribution will reduce your taxes by $379. This is because your MTR (combined federal and provincial taxes) is 37.9%.
If you are paying taxes at all (which means you are earning more than, say, $20,000 taxable, then your minimum tax saving will be at the rate of 25.8%.
A top tax rate payer in Manitoba pays 50.4% tax on all income in excess of $222,000 taxable. That means a $1000 RRSP contribution would save $504 in taxes.
(The converse is also true… That last person would pay $504 in income taxes on $1,000 of interest income or a $1000 employment bonuses, while the lower tax bracket people would pay proportionately less. But I digress…)
An easy place to check your own marginal tax rate is at www.taxtips.ca
In addition to the immediate tax saving from an RRSP contribution, all interest, dividends, and capital gains earned on that money while it is within the RRSP is not taxable. And the likelihood of a good long term investment policy means that the money can grow significantly, if you have many years between now and retirement.
Further, if you take the resulting tax reduction from your contribution and invest that, you can really turbocharge the growth of your retirement savings.
So, should you contribute? If you are in a medium or high tax bracket now and you expect to be in the same or lower tax bracket when you withdraw the money from your RRSP, then the answer is probably yes. And the RRSP should probably take precedence over maximizing your TFSA.
On the other hand, if you are in one of the first two tax brackets and you expect to be in the same or a higher tax bracket in retirement, then the TFSA is probably a better choice, because future withdrawals from the TFSA are not taxable.
There are lots of other variables and each person’s circumstance is unique, so I strongly recommend you get individualized advice on these decisions.
No cash? If you have a decade or more before retirement and your current taxable income is in excess of $85,000, then consider borrowing money for a contribution, assuming you have enough extra cash flow to pay off that loan within a year.
Even better is to also start a monthly contribution plan toward next year’s RRSP contribution, so it will be looked after in advance, and it can earn investment income throughout the year.
Remember, midnight March 1 is the absolute deadline, so get your planning done now.
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Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.
Please consult legal, tax, insurance and investment experts for advice on your unique situation.
David Christianson, BA, CFP, R.F.P., TEP, CIM is recipient of the FP Canada™ Fellow (FCFP) Distinction, and repeatedly named a Top 50 Financial Advisor in Canada. He is a Senior Wealth Advisor and Portfolio Manager with Christianson Wealth Advisors at National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.