# How do Ontarians calculate optimal RRSP contribution?

Pls see my dad in Ontario's facts. He maxed out his TFSA, and his annual pre-tax income (henceforward "APTI") is \$50K. CRA website shows his 2019 RRSP deduction limit is \$100K.

If I understood this Reddit post, comment by LazloStPierre, by Palestrina,

1. is optimal RRSP deduction = min([RRSP contribution limit, 8% taxpayer’s pre-tax earned income for previous year, min(Maximum federal tax bracket < APTI, Provincial tax bracket < APTI))? I don't think I formulated correctly.

I input my dad's facts into WealthBar -

1. Thus my dad ought contribute to his RRSP 50K (annual income pre-tax) - 5K (yearly tax deductions) - 43906 = 1094. Correct?

Your formula above is correct in terms of maximum return on investment for RRSPs.

The "optimal" RRSP contribution really depends on your anticipated financial future and savings goals.

RRSP contributions are refundable tax credits, which means you get the entire amount of income tax paid on that dollar amount refunded. This is because RRSPs are taxed when the money is withdrawn, not when it is contributed, it is effectively delaying the income tax to when you are retired and have a low annual income, usually one or two marginal tax brackets below your current income.

Your dad's current income tax bracket is 29.65% (9.15% Provincial, 20.5% Federal) However it appears that he already has \$5000 in tax credits from your post. This would bring his tax bracket down to 24.15% (9.15% Provincial, 15% Federal). He would get the largest return by contributing the maximum amount remaining in this 24.15% tax bracket, which you correctly calculated as \$1094. If he contributes any more than this, he will only get a 20.05% tax return on those additional contributions.

However, this doesn't mean that this is the correct amount to contribute. Your dad has a \$9000 RRSP contribution limit (18% annual income) minus any workplace pension contributions. Any contribution limit in excess to what he has contributed carries over to future years, so he may have a lot of room in his RRSP depending on his previous contributions. This leaves a lot of extra room to invest, which if he maxes out his TFSA it seems he is capable of doing.

If he expects his income to increase faster than inflation, then it is a good idea to contribute the \$1094 for now to get the maximum percentage return, then increase his contributions with his income to continue to get that 24.15% return, while using up the contribution limit carried over from previous years. However if he isn't expecting any increase in income, then this \$1094 contribution won't leave him with a lot of money come retirement (which is the entire goal of the RRSP). These RRSP investments in theory increase in value faster than other comparable investments such as a TFSA since you are getting that additional contribution room from tax refunds versus making investments with income that has already been taxed.

To truly figure out his "optimal" contribution, he needs to calculate what amount he needs for retirement on top of any workplace pension, Canada pension plan, old age benefits, other investments, etc. Then contribute enough for him to make that additional annual withdrawal come retirement.

TLDR: Contribute the \$1096 based on your current calculations if he expects his income to increase significantly in the future, otherwise contribute the amount that will leave him with enough money to retire.

• Thanks. Just checking if (i) you read the linked post? See points 1 and 4 there.
– user40269
Aug 4, 2019 at 4:56
• (ii) "Your dad has a \$9000 RRSP contribution limit (18% annual income) minus any workplace pension contributions." The \$5K include his workplace pension contributions. (iii) Can you please edit your post to reflect these facts? I added to my post "his 2019 RRSP deduction limit is \$100K".
– user40269
Aug 4, 2019 at 4:58