# Should I buy rrsp?



## 2tire2work (Jul 20, 2013)

I am questioning rrsp's tax benifit. Here is my situation. I own a business. I only pay myself 50k a year and the rest stays in the corporation. Rrsp reduce my income to the next tax bracket and saves me 7% of income tax. But I can't live with $43 k a year in my retirement. And most likely I will be making more money in the following years. Do I still come out ahead with rrsp?
I did buy rrsp years ago when my income was in the 20k range and saved some tax. But I will be paying more than I saved in my retirement. It's been 8 years and I am thinking buying them again. But I am not sure. 
Thanks in advance.


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## none (Jan 15, 2013)

Is your TFSA maxed out?


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## Sampson (Apr 3, 2009)

2tire2work said:


> Rrsp reduce my income to the next tax bracket and saves me 7% of income tax.


Your average tax rate drops by 7%? Hard to believe.


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## 2tire2work (Jul 20, 2013)

It can be maxed out

I meant the marginal tax rate drops 7%. But I can't live with that income bracket. 
Do I make sense?


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## GoldStone (Mar 6, 2011)

The difference between the two marginal tax rates (now and in retirement) isn't the only factor. You have to consider the tax-free compounding as well.

See Myth #2
http://www.theglobeandmail.com/glob...are-of-these-three-rrsp-myths/article9235153/


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## cainvest (May 1, 2013)

GoldStone said:


> The difference between the two marginal tax rates (now and in retirement) isn't the only factor. You have to consider the tax-free compounding as well.
> 
> See Myth #2
> http://www.theglobeandmail.com/glob...are-of-these-three-rrsp-myths/article9235153/


True enough but I find for a number of people, those who really don't know (or can't make an educated guess) what their retirement income will be it makes sense to load up the TFSA first IMO. The TFSA becomes your marginal tax rate "adjuster" for retirement income and can also play a potential role in clawbacks, again depending on your income. There are many variables here with no one simple solution for all ... it really depends on your financial plans.



2tire2work said:


> I meant the marginal tax rate drops 7%. But I can't live with that income bracket.
> Do I make sense?


Not sure what you mean by "But I can't live with that income bracket" ?


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## 2tire2work (Jul 20, 2013)

Thanks. I will start to catch up on rrsp


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## 2tire2work (Jul 20, 2013)

Tax rate for income under 42k is 28%
Tax rate for income between 42k and 78k? Is 35%
And I need 50k a year for my expenses. 
If I can live off 40k a year. I know I will save taxes to buy rrsp. Is my assumption valid?


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## Eclectic12 (Oct 20, 2010)

2tire2work said:


> ... If I can live off 40k a year. I know I will save taxes to buy rrsp. Is my assumption valid?


Maybe ... 

What are your sources of income in retirement? 
What do you mean by you are expecting a higher income in future years?

I'm thinking that you put money into the RRSP now, take the tax deduction to fund your TFSA. 
You then monitor the RRSP's growth and at an appropriate time - stop paying yourself from the corporation and pay yourself from the RRSP. If everything else stays the same, the tax rate should stay the same, allowing you to drain the RRSP, without bumping up the income taxes being paid. 

Or is there some requirement that your corporation pays you the $50K or restricts what your choices are?

Note that I'm assuming the tax being paid by the corporation is going to equal or less than your personal income tax on similar amounts of money so leaving extra money in the corporation could be a wash and/or a benefit.


Off the top of my head, the advantage is that all of the RRSP growth is tax deferred, using the full amount today, allowing you to make use of the tax refund. 

Then too, if you haven't already maxed out the TFSA, there's years of additional contribution room that will have been added. 


Cheers

*P.S.*

If what the income the corporation pays you is at your choice, it would seem you are in a good situation to make sure that the income tax rate on the RRSP withdrawals is pretty close to equal or less than when you make the RRSP contribution.


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## 2tire2work (Jul 20, 2013)

Thanks for the advice. I need aprox 50k for my living expenses. So I just choose to pay myself that much. The rest of the money stays within the corporation. This is one of the tax saving ideas I know besides buying rrsp.


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## Mall Guy (Sep 14, 2011)

I know I am being too picky . . . BUT you don't "buy" an RRSP, you open a registered account and buy investment within the framework of that account . . . otherwise you end up with 14 (whatever) RRSP accounts at various places wondering what you have invested in . . . rant du jour


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