I’m a big fan of RRSP’s as an investment vehicle for Canadians. An RRSP is a fantastic way to decrease your tax bill and grow your investments tax-free, at least until you are ready to withdraw the money. I’m a firm believer that anyone who is paying a marginal tax rate of more than 26% (income greater than $44000 here in Saskatchewan) and has some money that they can safely put somewhere they won’t be able to touch it for awhile should be contributing to an RRSP.
Now after saying all that though, I’m still not going to be claiming an RRSP contribution for 2014. Here’s why..
I graduated from post-secondary in 2014 and only worked full-time for 7 months that year. This means that my marginal tax rate is only 26%, not the 35% that it will be next year. So if I were to claim $5000 in RRSP contributions in 2014 I would decrease my tax bill by $1300. If I wait till next year to claim the $5000 my tax bill would be lowered by $1750. It’s more than worth it for me to wait a year to save an extra $450, especially since I can put the $5000 I was going to claim to work right away even if I don’t claim it till next year. There are a few options available
Contribute to RRSP but don’t claim it
You can actually contribute to your RRSP and not claim it that year as long as you have enough available RRSP contribution room. So if you have $5000 in contribution room for 2014 you can put $5000 into your RRSP and let it grow tax-free until you decide to claim it. You will have to claim the contribution at some point but this allows you to claim it when your marginal tax rate is higher and gets you the most bang for your buck.
Contribute to TFSA
Another option is to take the money you would have claimed as RRSP contributions and instead put it into your TFSA. Again this money would be able to grow tax-free but even better you wouldn’t have to pay any taxes if you withdraw the money from the TFSA like you would have had to with an RRSP contribution.
Both options work well if you have the money available and it really comes down to if you might need to withdraw the money at some point in the next year. If you contribute the money to your TFSA you can always transfer the investments to your RRSP before you want to claim the contributions.
TFSAs and RRSPs are great tools for Canadians looking to save money and invest for their futures, they should be used strategically to make sure that you are getting the most benefit possible out of your tax-free accounts. Whether to save in your TFSA or RRSP, or if an RRSP contribution even makes sense this year needs to be decided on a case by case basis based on your individual situation.
Additional resources on RRSPs
- Canadian Investing With Mr Frugal Toque – Mr. Money Mustache
- A great article on Canadian investing that talks about why RRSPs are such a great deal
- Common RRSP Myths – Our Big Fat Wallet
- Some common RRSP myths from a blog I really enjoy