RRSP: The Misunderstood Tax Planning Tool |
Posted: November 12, 2017 |
Shayan Hamdani, Financial Advisor Manulife Securities. Millions of Canadians will be rushing to their banks and financial advisors to make an RRSP contribution. However, there are a lot of people who buy RRSPs but don’t really know why. Many people buy RRSPs to get a tax deduction but that’s a little short-sighted. There’s a lot more to making a good RRSP decision than just getting a tax deduction. Remember at some point down the road, you will have to pay the tax back to the government. So how do you know if buying RRSPs is the best decision for you? Should you contribute to RRSPs or to a TFSA (Tax-Free Savings Account)? Or are you better off paying down debt? Let’s explore some case studies to see when RRSPs make sense. Case 1: Meet Dan & Emma. Dan and Emma are both in their mid 40s, live in Oakville with their beautiful daughter Jane. Dan works as an engineer earning $120,000 a year as salary. Emma is a marketing consultant earning $100,000/ year also as a salary. They have no pension plan at work. They have a mortgage on their house for $300,000 that is fixed for 5 years at 3.2%. They have no other debts. Do RRSPs make sense? If so, why? For Dan & Emma, the decision to invest in RRSPs is straightforward. Their marginal tax rate at the time of contribution is greater than the marginal tax rate at the time of withdrawal because they are only entitled to government pensions. Case 2: Meet Rob & Karen. Rob and Karen are both in their late 50s and looking to retire by 65. Rob is a high school teacher at the Catholic School Board earning $80,000/year. Karen is a Nurse and also earns a salary of $75,000/year. At age 65, they are both entitled to receive a pension of $50,000/year. Do RRSPs make sense for Rob & Karen? Rob & Karen do not benefit from tax deductions because they would be at the same marginal tax rate in retirement. The only benefit would be tax deferred growth. Furthermore, they need to be mindful of the OAS clawback zone. Retirees with income above $74,789 (2017 OAS clawback threshold) are subject to “OAS recovery tax” which is essentially another tax. If income is above the threshold, government starts to clawback OAS at 15 cents for every additional dollar of income earned! Keeping all this in mind, Rob & Karen would be better off investing in a Tax Free Savings Account (TFSA) because of their pension. Before putting another dollar into your RRSP, take some time to understand whether you are getting the most bang for your buck. The decision to invest in RRSPs should be made by devolping a plan that encompasses all the moving parts.
|
|||||||||||||||||||||||||||||||||||||||||||
|