RRSP - How Much Should You Contribute?
We often get asked the question: how much should I contribute to my RRSP?
The answer is always going to depend on your unique situation and your goals.
However, this article is here to help you decide how much you should contribute based on your own unique circumstances.
How RRSPs Work (Quick Recap)
First up, a very quick recap about how RRSPs, work.
RRSPs, AKA registered retirement savings plans, are investment accounts made available to Canadians by the Federal government.
You get a personal tax deduction when you contribute cash into your RRSP account.
That cash can then be invested within your RRSP, where the investments grow tax free.
The funds and investments in your RRSP are only taxed when you withdraw them.
Withdrawal typically happens at retirement, but sometimes you’ll see people withdraw funds for major events like buying a home or going to college.
There you go, those are the basics. If you want to learn more, check out our Ultimate Guide to RRSPs.
RRSP Deadlines and How 2024 is Different
Next up, let’s talk about RRSP deadlines. These are key to making the most of your contributions.
Typically, the RRSP contribution deadline is 60 days into the new year.
This means for most years, you have until March 1st to make contributions that count towards your tax deductions for the previous year.
It’s designed this way to give you a bit of a buffer after the year-end to top up your RRSP and maximize your tax savings.
But 2024 is a bit different – it's a leap year.
So, this time around, the deadline falls on February 29, 2024, not the usual March 1st.
It's a small change, but it's crucial. This leap year adjustment means it will seem like you actually have one less day than you're used to.
So mark your calendars, set a reminder, or preferably, just handle those RRSP contributions right after reading this article.
RRSP Contributions - How Much Tax Will You Save?
Alright, it’s time to answer the all important question: how much tax will I save if I contribute to my RRSP?
The answer is… IT DEPENDS!
The reason it depends is that RRSP contributions reduce your taxable income and not your tax directly.
Tax savings can be approximated by multiplying your marginal tax rate by your total RRSP contributions for the year.
(Not what I’m talking about? Learn more about how tax brackets work)
For example, if you earn $50,000 your marginal tax rate will be approximately 23%.
So $1,000 of RRSP contributions would save you $1,000 multiplied by 23% which equals $230 in tax saved.
If you earned $250,000, your marginal tax rate is closer to 54%.
In this scenario, if you contributed $1,000 to your RRSP, your tax savings would be calculated as $1,000 times 54% or $540.
This is a bit of a simplified explanation, but up next I’ll show you how you can get a really good estimate of tax savings given your own annual earnings and marginal tax rate.
RRSP Tax Savings Calculator
Here is a quick way that you can calculate your own tax savings from RRSP contributions. It only takes about 5 minutes and is a really interesting exercise to try out.
Learn how in this short video or follow the instructions below.
Step 1 - Navigate to the Wealthsimple Tax Calculator
Your first step is to navigate to the free Wealthsimple tax calculator.
Step 2 - Enter Your Income Information
Once you see the tax calculator, you’ll first choose your province or territory from the drop-down menu.
Then fill in how much income you’ve earned during the year.
This could include:
- Employment Income - This is just income that you earn from having a job. You can typically find the total amount for the year on your T4. Or, if you don’t have your T4 yet, check your last pay stub and enter the year-to-date amount.
- Self-employment Income - If you’re self employed, enter the NET self-employment income that you earned during the year. This means you’ll calculate your total revenue, subtract your expenses and enter the result. If you don’t know for sure, it’s ok to use an estimate.
- Capital Gains - These are typically gains you’ve made on the sale of investments calculated as total proceeds of sale minus cost. Go ahead and enter the amount of any capital gains you earned during the year if you have any.
- Dividends - If you’ve earned dividends on any unregistered investments or from a corporation that you own, you’ll enter those in either the eligible dividends or ineligible dividends fields. You can find the amounts on T5 slips that get sent to you from your investment provider or your accountant.
- Other Income - Any other income that you have can be entered into the “other income” section. This commonly will include interest income, CPP, OAS or EI.
Leave any amounts that don’t apply to you as $0.
Once you’ve entered your total income into the calculator, you’ll see an estimation of the total tax you would owe without RRSP contributions.
Step 3 - Enter RRSP Contribution Amounts
Which leads us to the third and final step - entering RRSP contribution amounts to see how much tax you’ll save.
I usually start with $1,000 to see how much I’ll save per $1,000 of RRSP contribution.
In our fictional example above, you’ll see a total income figure of $200,000 and a marginal tax rate of nearly 46%.
So when we include $1,000 of RRSP contributions, the tax savings will be right around $460.
You can play around with the RRSP contribution number based on how much you think you would want to contribute.
Then just check to see the approximate tax savings. Easy!
When Not to Contribute to RRSPs
Now that we have an understanding of how your marginal tax rates work and how RRSP contributions affect tax, we should talk about when it might NOT be a good idea to contribute to your RRSP.
Low Income Years
If you're currently experiencing a lower income year, it might be better to wait. Contributing to an RRSP is most beneficial when you're in a higher tax bracket, as the tax savings are more significant.
If your income is lower this year, consider waiting until you're back in a higher bracket to make the most of those tax deductions.
Anticipating Higher Future Income
Similarly, if you expect your income to increase significantly in the near future, it could be wise to delay your RRSP contributions.
By contributing in a year where you're earning more, you'll get more tax relief.
This is a common strategy for early-career professionals who expect their income to grow over time.
Need for Liquidity
RRSPs are fantastic for long-term savings, but they're not so great if you need liquidity.
Withdrawing from your RRSP can trigger a tax bill, and you lose that contribution room forever.
If you foresee needing access to your funds in the short term, you might want to reconsider or opt for a more flexible savings vehicle like a TFSA.
Check out the TFSA vs RRSP video linked in the description to learn more about this topic.
Maxed Out Contribution Room
If you've already maxed out your RRSP contribution room, adding more can lead to over-contribution penalties.
It's important to be aware of your contribution limits, which you can find on your latest Notice of Assessment from the CRA or through your online “CRA My Account.”
High Debt Loads
Lastly, if you're carrying high-interest debt, like credit card balances, it may be more prudent to pay down that debt first.
The interest savings from reducing high-interest debt can often outweigh the benefits of the tax deductions from RRSP contributions.
Alright, that is all of the info I wanted to get through about your RRSP contributions this year.
If you’re considering contributing, make sure to do so before February 29th!