Too many of us become confused by all of the "noise" of the RRSP season as institutions flog their products and past performance numbers in vast quantities in every form of media. Products however, should not be the number one consideration just before the deadline.
To help save our sanity we are usually better off at this late date to focus instead on attaining the best RRSP deduction possible and leaving the product choice to a time when we or our financial advisors can concentrate better.
What I mean by attaining the best RRSP deduction is,
making the maximum use of the RRSP contribution rules to save the most
on current and future tax. Contributions can be made to a money
market account or savings account until more time can be given to
The first rule of thumb for married couples is to consider the retirement income picture of each spouse. If there will be any inequalities between the two, they should utilize the spousal RRSP option to work towards equalizing both retirement incomes and thus minimizing post retirement income tax as a couple.
A large deduction in one year may reduce your taxable income to a point where you are saving tax at a lower marginal rate than if you were to apply the deduction over two or more years to reduce your tax at your highest marginal rate. Income tax is a graduated system where the rate of taxation increases as taxable income rises. And conversely, the rate at which tax is saved declines as RRSP deductions reduce taxable income through each level. A large RRSP deduction could reduce the rate at which federal tax is saved from the highest level down to the lowest level. When surtaxes and provincial rates are factored in there can be a substantial reduction in potential savings.
It would be better to work through your tax return first to determine the optimum amount to apply to the current tax year, borrow what is required and save the rest of your contribution room and loan costs for later tax years.
If you are not borrowing, you could make the large RRSP contribution and just deduct enough to save taxes at your highest marginal rate, saving the rest of the deduction to the next tax year. This way you are maximize your RRSP tax savings.
If you had a spouse who passed away during the
year, work through their final return to see if they had any RRSP contribution
room along with tax payable. If so, make a spousal contribution in your
name, if age permits, with your deceased spouse as the contributor thus
reducing the tax payable on their final return.
Have a question regarding this article? Use our feedback form to send us a note.
© , Fiscal Agents Money Management Newsletter