RRSPs ARE GREAT…ALMOST ALWAYS
1. Contributions to an RRSP will grow most investments tax-free, but the entire RRSP will be fully taxed when the funds are withdrawn.
Ideally, those contributions will be claimed in years when the plan holder is in peak earning years and at a high marginal rate and withdraw the funds in retirement at a low marginal rate.
Marginal tax rates rise as an individual’s income grows. Canadians who made less than $45,000 last year, normally pay less than 20 percent. The rate grows as income grows; sometimes over 50 percent on the top tier amount.
If you contribute when it would have been taxed at a low marginal rate, your refund will be much lower than those with income taxed at a high marginal rate.
If your income was lower than usual in 2022, an RRSP contribution can be made at any time and claimed in a higher-income year.
Young Canadians might want to take a pass and save their RRSP space for their higher-income years. Contributions to a tax-free savings account (TFSA) might be a better idea because – while the contribution is not tax deductible – withdrawals are not taxed.
Online calculators or a qualified advisor can help take you through various scenarios to determine the potential size of your refund.
