# Lots of RRSP contribution room. How much should I use this year?



## wladek (Feb 24, 2013)

Hi,

I'm having an issue pulling the trigger on a retirement investment portfolio. Let me describe my situation.

I was saving up for a down payment on a property. To this end, I only contributed enough to my RRSP to be able to get the maximum payout as per first time HBP plan. I've maxed out my TFSA contributions. The rest of my savings are in a taxable savings account. Now, I've decided that *I will not be purchasing property* any time in the near future. I would like to reallocate all my total savings (minus an emergency fund) toward a retirement investment portfolio.

I've already put all the money I have in my registered accounts into my retirement portfolio. I would like to use all of my available savings in my non-registered accounts in my retirement investment portfolio too. Because I have not been contributing to my RRSP I have accumulated a significant amount of contribution room. What I'm having trouble doing is determining the most tax efficient way use this room. Here are some rough facts.

Province: Ontario
Savings available to use in retirement portfolio: $40,000
Accumulated RRSP contribution room: $60,000
Estimated 2013 income: $100,000

These are my options as I see them.


Put the entire $40,000 into my RRSP now and use it in my retirement portfolio. Take whatever RRSP tax refund I get and put that into my RRSP for the following year.
Put approximately $20,000 into my RRSP now to reduce my income to a lower tax bracket ~$80,000 and do same in following tax years until I've maxed out my contributions. Take any of my savings left over in my non-registered accounts and buy securities for my retirement portfolio. Take whatever RRSP tax refund I get and put that into my RRSP for the following year. Cash out the remainder of what I can contribute from my non-registered accounts (that's would be currently invested in my retirement portfolio) and put that into the RRSP as well.

I see option 2 having way more tax implications than 1 (especially with some of my portfolio's securities being in USD), but it might allow me to maximize my refunds each year assuming I continue to make the same income. Option 1 would be far simpler, but I may lose some of what I get back in tax refunds.

This situation is paralyzing my decision on how to apply my non-registered savings toward my retirement portfolio and I lose more possible gains every day I let it idle in a savings account. Ultimately I know I should seek the services of an accountant to figure out actual numbers, but I would like to get some preliminary advice from you folks before I proceed.


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## GoldStone (Mar 6, 2011)

You don't have to deduct your RRSP contribution right away. You can carry it forward and deduct it later. So you can blend your two options. Contribute the entire $40,000 at once. Do partial deductions a few years in a row. Deduct just enough to bring your taxable income down to the lower boundary of your current tax bracket.


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## wladek (Feb 24, 2013)

GoldStone said:


> You don't have to deduct your RRSP contribution right away. You can carry it forward and deduct it later. So you can blend your two options. Contribute the entire $40,000 at once. Do partial deductions a few years in a row. Deduct just enough to bring your taxable income down to the lower boundary of your current tax bracket.


That's terrific. Although I do feel quite stupid now for waiting as long as I have. Thank you.


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## GoldStone (Mar 6, 2011)

Keep in mind, you delay the refund when you delay the deductions. You might be better off taking a smaller refund now so you can invest it sooner. Do a break even calculation.

Ontario tax rates
http://www.taxtips.ca/taxrates/on.htm

Income: 100K

Option 1:
Deduct 13K to bring income down to 87K
Refund: 13K * 43.41%

Option 2:
Deduct 18K to bring income down to 82K
Refund: 13K * 43.41% + 5K * 39.41%

43.41% - 39.41% = 4%. This is your break even annual rate of return, after taxes. If you think you can earn a better rate of return, you are better off with option 2.


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## recklessrick (Jun 16, 2013)

I was wondering something along the same lines. I'm in SK and have a projected income of about 97k for 2013. I have 49k worth of RRSP room. I was trying to figure out the benefit of lowering my taxable income (through RRSP contributions) to below 87k. From what I can see, that's a savings of 4% based on the taxtips.ca website for 2013.

How does that calculation work? It's 26% on first ~42k, 35% on next ~43, 39% on that 10K over 87k I would have. I'm trying to figure out what savings I would have by not going into that next tax bracket...

Far as I can tell, I'd avoid paying $3900 worth of tax. (10k *.39% on that 10k above 87k).

Is that correct?

EDIT: This I found the answer to be yes based on this calc


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## Cal (Jun 17, 2009)

wladek said:


> That's terrific. Although I do feel quite stupid now for waiting as long as I have. Thank you.


Better late than never.


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## Eclectic12 (Oct 20, 2010)

GoldStone said:


> Keep in mind, you delay the refund when you delay the deductions.
> You might be better off taking a smaller refund now so you can invest it sooner ...


Maybe it's lack of sleep ... but I don't get this.

The way I read this, the contributions are cash on hand and the deduction is in the same tax year. 
So for refund money to be re-invested - it's going to the same waiting period, regardless of where the tax rate is reduced to.




GoldStone said:


> 43.41% - 39.41% = 4%.
> This is your break even annual rate of return, after taxes. If you think you can earn a better rate of return, you are better off with option 2.


Hmmm ... shouldn't the better off option be #1?

Option #1 leaves $5K of after-tax dollars available for investing at a rate higher than 4%, today.


Of course, another variable to consider is that if one uses an employer GRRSP or uses a PAC to make scheduled RRSP contributions plus files a T1213 request to reduce tax deduction at source form, the refund can be received well before the tax return is filed.


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## Eclectic12 (Oct 20, 2010)

wladek said:


> I see option 2 having way more tax implications than 1 (especially with some of my portfolio's securities being in USD), but it might allow me to maximize my refunds each year assuming I continue to make the same income.


Yes option 2 would have more tax implications. Beyond any yearly income to report such as dividends, income, capital gains & RoC (where the ACB is negative), there will be capital gains (or loss) when sold or transferred to the RRSP.

Have you maxed out your TFSA yet? 

Assuming you were 18+ in 2009, are a Canadian resident during these years & haven't contributed yet - you will have $25.5K of TFSA contribution room available for tax free investing (except for the IRS dividend withholding tax on US dividend paying stocks).

You can then use your regular income, setup as scheduled RRSP contributions where a T1213 form will get the tax refund to you during the same year, before the tax return is filed. If it made sense, you could then transfer assets (or withdraw cash) in Dec from the TFSA to add any additional RRSP contributions to hit the preferred tax rate.




wladek said:


> Option 1 would be far simpler, but I may lose some of what I get back in tax refunds.


If you mean losing the ability to invest the refund - make sure to balance that against the fact the RRSP contributions would be growing tax free (i.e. contribute $40K, the contributions are tax deferred versus how much is the delayed refund amount?).

As a final thought - what's the harm in contributing the full $40K & deducting it in the same tax year? 
This would minimise the time the refund money is not available.


Cheers


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## GoldStone (Mar 6, 2011)

Eclectic12 said:


> As a final thought - what's the harm in contributing the full $40K & deducting it in the same tax year?


I will respond to this now and will leave the rest until I have more time.

The harm is, your taxable income drops in the lower tax bracket(s) if you deduct the full $40K. The portion of $40K that you deduct against the lower brackets earns the refund at a lower rate.


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## Guban (Jul 5, 2011)

recklessrick said:


> I
> Far as I can tell, I'd avoid paying $3900 worth of tax. (10k *.39% on that 10k above 87k).
> 
> Is that correct?
> ...


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## peterk (May 16, 2010)

GoldStone said:


> 43.41% - 39.41% = 4%. This is your break even annual rate of return, after taxes. If you think you can earn a better rate of return, you are better off with option 2.


I'm not sure this is quite right?

RRSP $1000 this year and get $394.10 back from the tax man. That's 1394.1*(1+i) next year
Alternatively, invest $1000 now for one year, and get back $434.10 from next year's return. That's 1000*(1+i)+434.1

Solve iteratively for i to get 10.15% breakeven investment return. So unless you can get 10% in the year (guaranteed) you are better waiting till the next year and using the higher bracket. 

I've made a spreadsheet for this but don't know how to upload it...


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## GoldStone (Mar 6, 2011)

You are right. I made a mistake when I subtracted the tax rates. I should have done a percentage calculation.

(43.41% / 39.41%) - 1 = 10.15%


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## peterk (May 16, 2010)

Well, that's certainly simpler than the spreadsheet it took me an hour to figure out how to make from first principles!

Curse my weak algebra.


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