6

If I apply the information from Global News, MoneySense, the Wealthy Barber, and Reddit to the facts beneath, then then my dad oughtn't contribute to RRSP, correct? Thanks!

Facts

  1. He's 63 years old, and has no children under 18. He works at a hotel, and lives, in Ontario. His annual gross salary is $50K (thus 40K post-tax), and increases by $500 pre-tax annually.

  2. He spends $30K annually, and buys ETFs with the remaining $20K. He expends his TFSA annual contribution limit annually.

  3. Thus $9K (= 18% × 50K) is his RRSP contribution limit. He hasn't opened a RRSP account yet. But any deposit there would be intended for the long term. Thus he can invest in ETFs like XQB (Bond) + VEE, XEF, XUU (Equities).

  4. He plans to work as long as he can physically. He has always conserved $30K in a fully liquid high-interest savings account for emergencies.

  5. He plans to claim all retirement benefits as soon as he's eligible. Better to gain less money earlier, than dying early and get nothing!

  6. He bought a house before, and thus can't qualify for the RRSP Home Buyers' Plan.

1

Given his TFSA is entirely maxed out, it is not necessarily true that he shouldn't contribute to his RRSP; the benefits will just be smaller than they would be under different circumstances.

The benefit of an RRSP contribution today, is an immediate deduction from his income on this year's tax return. The penalty of an RRSP withdrawal in the future, is that it will be added to his income in the future.

In simple terms, he gets the time value of those tax savings today [instead of investing his money in after-tax dollars, he invests more money now, because those dollars invested haven't been taxed yet]. But if his income will be higher in the future than today [or, if income tax rates increase in the future], he will lose some / all of the benefit, because he will pay higher taxes later on.

The second benefit of the RRSP, is that every year, he gets the compounding effect on all of the additional earnings he was able to contribute because he hasn't paid taxes yet. So if he contributed 20k [when he would have contributed 16k before tax], then in year 1 he gets the earnings on the extra 4k, and then in year he gets the earnings on 4.2k, assuming he earned 5% in the previous year.

If he chooses between his TFSA and his RRSP, the TFSA probably wins out if he has a short time frame until retirement. Otherwise, his RRSP will give him some amount of benefit unless he expects his retirement income to be higher than his current salary income, or unless tax rates increase in the meantime.

Note on the benefits - if he dies before withdrawing all of his RRSP, that money is not lost, it will be passed on to the beneficiaries in his will; this is not like CPP income. If he wants to enjoy the benefits of that money entirely, and doesn't want to leave anything behind in his will, then of course, saving money for retirement creates that "risk". The benefit, of course, is a larger nest egg to sustain him for a longer life.

  • Upvoted! Many thanks!!! I edited my post to add more details - do they affect your answer? – Amanda d'Halluin Apr 11 at 2:17
  • "unless he expects his retirement income to be higher than his current salary income": Can you make this more specific please, in view of para. 1? – Amanda d'Halluin Apr 11 at 2:18
  • @Amandad'Halluin Good for him to be contributing so much of his salary on retirement savings! What I mean above, is that if his income is, for example, 50k today, his marginal tax rate in Ontario would be about 30%. So he would get a 30% tax savings for each dollar contributed to an RRSP. But if his income was, say, 80k when he retires [ie: if he has a massive pension from prior jobs, things like that], then he would be taxed at around 32% on the income when he withdraws it. It seems unlikely for this to be a concern, because there is a large jump from 50k to 80k; doesn't seem likely. – Grade 'Eh' Bacon Apr 11 at 12:44

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.