RRSP Considerations and Strategies

I admit the literature is plentiful on RRSPs, however it is always helpful to review the strategies that make sense for you at this time of year. There are a couple key considerations I’d like you to think about as you start to plan for your RRSP contributions for the 2023 tax year:

 

(1) How much income did I make in 2023 and how much do I foresee needing on an annual basis in retirement?

• If your income for 2023 was significantly greater than your expected income needs in retirement, maximizing your RRSP contribution this year may be a good idea.
• As an example, let’s say you made $250,000 last year in Ontario. Your average tax rate and top marginal tax rate would be 36.86% and 53.53% respectively.
• If you anticipate generating $100,000 a year in taxable income in retirement your average tax rate and top marginal tax rate would be 22.13% and 37.90%.
• Therefore by making the RRSP contribution for 2023 you will (1) receive a tax-refund for the contribution by reducing your taxable income by the amount you contribute and (2) pass on this income to a lower income tax year therefore saving you money on income tax over your lifetime.

(2) How much in RRSPs do I have relative to my spouse/common-law partner?

• If you’ve amassed a substantial amount of RRSPs relative to your spouse, consider focusing on investing in a spousal RRSP
• The benefit of a spousal RRSP is you receive the tax benefit of the contribution in the current year and are able to effectively income split registered income with your spouse in retirement, regardless of pension income splitting rules which I’ve spoken of before.
• As an example, let’s say one spouse has $300,000 in RRSPs and the other spouse has $100,000 in RRSPs and they plan on retiring at age 60. Given income splitting provisions for RRIF income (which is what a RRSP is converted to generate income) do not come into effect until age 65, focusing on investing in a spousal RRSP would allow this couple to balance out their RRSP assets prior to retirement and equalize their RRSPs so that the income drawn from age 60-65 can be effectively “split” by drawing equal amounts every year from these accounts, instead of one spouse having substantially more RRSP/RRIF income than the other.

• To further illustrate the impact of this strategy, let’s compare two couples who need to draw $50,000 from their RRSPs every year.  I have assumed in addition to their RRSP income each spouse/common-law partner generates $20,000 between CPP and other taxable income (such as dividends and other investment income). One household utilized a Spousal RRSP strategy and one did not however both households have $500,000 in RRSPs total:

	Equal Weighted RRSPs		Spouse 1 More RRSPs
	Spouse 1 (50%)	Spouse 2 (50%)	Spouse 1 (80%)	Spouse 2 (20%)
RRSP Income	$25,000	$25,000	$40,000	$10,000
Tax Rate (Avg)	14.00%	14.00%	17.35%	10.97%
Tax Payable on RRSP	$3,500	$3,500	$6,940	$1097
Household Taxes	$7,000		$8,037

• Even assuming a modest income draw of $50,000 every year from RRSPs and a household gross taxable income of $90,000 you can clearly see the benefit of a spousal strategy for income splitting purposes. In this example alone, this saves them $1,037 in income taxes as a household.

In sum, there is much more to the strategy of how you contribute to and use your RRSPs than what your RRSP contribution limit is for the year and making sure you get it done by the RRSP Deadline of February 29, 2024! If you have any questions on this front feel free to reach out to me directly.