Deciding on RRSP carryover amount

Question

I'm trying to do a last minute lump-sum RRSP contribution. I have an idea of how much I'd like to contribute/carry forward, but this is my first time making a significant RRSP contribution, so I'd like to make sure I'm not making any huge mistakes. I've rounded all of the numbers for simplicity.

• I live in Alberta
• My RRSP contribution limit this year is $26,000
• My taxable income is $63,000
• A financial windfall has left me $30,000 (post-tax) to invest for retirement
• I've already contributed $3,600 to a group RRSP this year
• I don't have any non-RRSP tax deductions

With this in mind, my plan is to make a lump sum contribution of roughly $13,400.

With this contribution, my total RRSP contribution will be $17,000, which is the difference between my taxable income and the lowest federal tax bracket. From my understanding of RRSPs, there isn't a large benefit from contributing once your taxable income is in the lowest tax bracket.

Next year, my taxable income will (hopefully) be $73,500, and my plan is to contribute 18% of that from each paycheque. That works out to $13,230, and deducting that, my taxable income would be $60,270.

I'll still have $12,600 of contribution space carried over from this year and $16,600 in my savings. If I then contribute $12,600 as a lump sum, my taxable income will be $47,670, which means that all of my tax deductions will be from the higher tax bracket.

All of this makes sense to me, but as I said, I want to make sure I'm not missing something in my understanding of RRSPs. I don't expect to be in the next tax bracket (~$90,000) in the near future, so I don't think there's any point holding onto the money for future contributions.

Answer 1

You don't seem to have any particular question to be answered. Your understanding of RRSPs seems to be very good.

Have you considered whether you might be better off putting your retirement savings into a TFSA instead? Both types can protect your growth from taxation (provided you reinvest the refund from the RRSP). The main way in which the RRSP is better than TFSA is that you can pay the tax on the contribution at a time when your income is lower, and thus have a lower marginal tax rate. Most people retire with a lower income than during their earning years, but it's a matter of tax brackets. If you think you'll be in the same bracket (same marginal tax rate) when you retire, then the TFSA and RRSP work out even in that regard. So in your case, the question you want to ask yourself is: when I retire, will I have an income (including CPP, OAS, pension payments, etc) that exceeds $45,282 worth of today's dollars? If so, your RRSP holds no advantage over the TFSA. In fact, the RRSP may even be worse, since the withdrawals count as income and reduce the amount of OAS and perhaps GIS payments that the government gives you - at least under current regulations. If you're unsure, I suggest you try this calculator from taxtips.ca that runs both scenarios and helps you see which one is more beneficial. It even factors in the OAS/GIS clawbacks.

Answer 2

It turns out that my logic was faulty. I wasn't aware that RRSP contributions and RRSP deductions are independent. There's no reason to split up my RRSP contributions across the two years.

In my original plan, I was going to defer some RRSP contributions until 2017 so that they wouldn't be deducted from my 2016 income. This isn't necessary — nothing is forcing me to deduct the entire RRSP contribution on my taxes this year. I can still follow the plan I described in my question and max out my RRSP contribution this tax year by only deducting part of the contribution on this year's taxes