Things to Consider Before Contributing to an RRSP

While contributing to RRSP offer the benefit of reducing your taxes by sheltering your income from tax when you contribute, it may not always be the best move. You will eventually pay income tax when you withdraw the funds, which is more advantageous when they have grown (tax-free) over time and when you’re in a lower tax bracket during retirement.

Before contributing to your RRSP, there are a few things to consider.

How much should you contribute to your RRSP based on your income?

In general, the higher your income and tax bracket, the more money you can save by contributing to your RRSP. For individuals earning more than $44,000 per year, it’s advisable to consider sheltering some money from tax by making an RRSP contribution.

If you’re a higher-income Canadian earning $88,000 or above, contributing to an RRSP is highly recommended. This is because any income above $88,000 is taxed at a higher rate, so it’s wise to shelter at least some of those top dollars from tax by making an RRSP contribution.

Should you contribute to your RRSP if you have a low income?

If you’re earning less than $44,000 per year, the tax savings per dollar contributed to an RRSP can decrease. While it’s generally a good idea to save for retirement, RRSPs might not be the best choice if your income is low. Instead, you might want to consider setting aside that money in a Tax-Free Savings Account (TFSA) or even a simple savings accounts for emergencies.

When your income increases and an RRSP contribution becomes a better financial decision, you can then transfer the saved money to an RRSP for maximum benefit.

In a scenario where one person earns a high income and the other earns a low income, what options are available to optimize their retirement savings strategy?

If you and your partner have different income levels, you might want to consider spousal RRSP contributions.