January 25, 2016
I took some time over the weekend estimating what my spouse and I will be allocating and filing accordingly for 2016 tax-year forms (aka. a dry, dry run). Our expenses and deductions are not overly complex, but I've now come across something that I never (or may have overlooked) come across before. I'm the lower income earner, so I'm required to claim the child care expenses (even though we equally contributed to the payment throughout the year). Throughout the year as well, I also have contributed to my RRSP. Based upon our estimates my net income and taxable income will be the same amount, whereas my spouse's taxable income will be less then her net income (as she will claiming certain deductions available to either of us).
After most net income expenses and deductions (pension, union and professional dues, and child care expenses) calculations are completed, I come eerily close (within a few hundred dollars) to the bottom of the tax bracket but without having deducted my RRSP contributions. My first question - is it wiser to deduct all or a small portion of the RRSP contribution?
I ask as I've come across a few articles suggesting that one scenario is to deduct RRSP contribution amounts so that one ends up at the very top of the next lower tax bracket, and then to carry forward remaining contributions that could be deducting down the road. My second question - what is (are) the benefit(s) to this practice (a shorter- or longer-term benefit)?
Our incomes are stable and receive annualized raises of ~1% per year, but it will still be some time - if ever - before either end up in the next higher income earning bracket. Major child care expenses will be reduced to half in Sept. 2018 (when our middle child begins school) and will stop entirely in Sept. 2019 when our youngest begins school.
October 21, 2013
Atlas, you don't say which bracket you're in, but that could make a difference.
Life has a way of making changes for you. A while ago, as I recall, your wife was applying for another job that probably paid more. The "experts" figure most people can expect their highest earning years to come after the kids have grown up, probably when they're in their 50s or 60s. So there is potential merit in postponing some or all of your rsp deduction. You may get a better paying job. You may inherit money or win the lottery and have higher investment income. Who knows?
Also, my analysis shows that tax brackets are a bit misleading. Although the rate does increase at a certain income level, if you are only just over the edge, it won't make much difference. However, might as well put yourself into the lower rate box.
There are very few actual deductions available in the current system. Most benefits come in the form of tax credits and don't affect net or taxable income per se, although do affect refunds. Are you absolutely certain that the things you have in mind qualify for deductions? (Just checking...)
I think it's important to be cold-hearted in looking at RSPs. In my opinion, it's somewhat misleading to call them retirement plans. In my view, they are simply income averaging systems. Put it in when you are in a higher bracket and take it out when you are in a lower one, whenever that might be. And be careful. RSPs aren't the best thing for everyone. If you are in a govt job, as most are in your area, and will get a good pension, and you also have RSPs and CPP/OAS, you could find yourself in a higher bracket than you expect when you retire. This leads not just to higher taxes but also to clawbacks on the Age Amount (kicks in around 36K) and the OAS clawback (kicks in around 73K). And it can get much worse than this because, eventually, one of you will die, at which point the survivor acquires the RSPs of the other, which can result in a very substantial RSP which in turn results in higher mandatory withdrawals, higher income and higher taxes and no possibility of income splitting or sharing. Finally, the survivor will die which can mean huge taxes because the entire RSP/RIF is all taxed in one year, reducing what your heirs can have. Now that I'm retired, this is all a lot clearer to me than it was when I was working. It has turned out that RSPs were not a good idea for me. I would have been better off never to have bought into them. But I didn't realize this was possible at the time because all the "hype" was that everybody should have them. Unless you are certain that your retirement income will be significantly into a lower bracket than what it is now (considering deductions), I wouldn't even bother with an RSP. I know this is not the question you asked, but it is what I have learned the hard way.
Others (Gordon Pape et al.) feel it's always a good idea to have an RSP but I haven't found those arguments persuasive for all circumstances.