A new year is upon us, and with the 2015 deadline to contribute to your RRSP is fast approaching, many media outlets are suggesting investing into a Registered Retirement Savings Plan (RRSP).
The question is, should I contribute, use an investment tool such as a Tax-Free Savings Account (TFSA) or pay down debt? The answer is always, “It depends.”
- What tax bracket are you in and what bracket do you expect to be in next year?
- If you are in a high tax bracket and expect to stay in a high bracket, contribute. This will lower your taxes for the year.
- Based on the new Liberal Government’s tax changes, starting in 2016, the personal tax rate in Ontario will be 53.53% on income over $220,000. Therefore, if you expect your income to be over $220,000 in 2016, it may be a good idea to save your room for next year.
- If you expect your income in the coming years to increase significantly, it may be a good idea to hold off contributing until those years. This will allow your RRSP room to grow and therefore enable you to deduct more in the years when you are in a higher tax bracket.
- Do you think your income will go down significantly next year? It may be a good idea to contribute and get a lower tax rate this year and then take it out when your income is lower. (As long as each withdrawal is less than $5,000 there will only be 10% withholding tax applied then will be included in total income for the year.) This will allow you to smooth out your income. Note that once it is withdrawn it cannot be put back in.
- Do you have children under the age of 17?
- Make sure you contribute the maximum annual amount of $2,500 to their RESP. The government matches your contribution at $0.20 on the dollar for a maximum of $500 annually.
- Will you be buying your first home in the near future and do not have $25,000 contributed? Contribute to your RRSP in order to make use of the Home Buyers Plan (HBP). Note, an amount needs to be in the RRSP for 3 months to qualify to withdraw for the HBP.
- If you already have $25k and have not purchased your first home, do not contribute more, you may need this money and will be taxed on withdrawal – use your TFSA
- Likely to need cash in short term? Planning to renovate your house? Have kids going off to university?
- Contribute to TFSA. This will allow your money to grow tax free and at the same time allow easy access to the money when you need it.
- Pay down debt?
- With the current interest rates being so low, it may be a time where you can earn more on your investments than the debt is costing you. The questions you need to ask yourself, am I risk averse? If so, pay down debt. Am I ok with the chance that I do not make money on my investments and interest rates increase?
How can S+C be of further assistance?
Should you have any tax questions regarding RRSPs or any other investment option, please do not hesitate to contact us! We always recommend you review your options with your trusted advisor.
We can help you with:
- Calculating your RRSP contribution limit. This is important as there is an over-contribution penalty should you exceed your limit.
- Determining whether an RRSP will be the best fit for you as opposed to other investments (TFSA, RRIF, etc.)
- Advising on the most tax-effective method on withdrawing from your RRSP to meet your individual needs, or dealing with your RRSP upon maturity (age 71)
- Consulting on the most tax-effective method on how to treat/transfer your RRSP upon death. There are qualifying beneficiaries to whom you can transfer your RRSP on a tax-deferred basis, and designated successors to whom you can transfer your RRSP to avoid certain withholding taxes.
Remember that contributions towards your 2015 RRSP limit must be made before 11:59pm on February 29, 2016 (first 60 days of 2016).
From your trusted advisors at S+C Partners LLP!