When is it Not a Good Time to Invest in RRSP?
- If your income is too low and you will not benefit from the tax deduction. Generally this is about $12,000 of income.
- If you will be in a higher tax bracket in retirement than when you are working. It’s rare, but it happens. For example, Martha owns her own business and spends next to nothing. She reports personal income of $33,000 per year. As a result of being a saver, she has accumulated $750,000 in RRSPs, $500,000 in investments and her business is worth at least $1,000,000. Her retirement income will be greater than $33,000, especially if she does not start spending some of her money. Martha should not buy RRSPs.
- If you have too much money in RRSPs. Some people just have too much success in their RRSPs and should not buy more. For example, George worked in the tech industry at the right time. His RRSP grew to over $1.5-million, mostly because he had stocks like Nortel and Microsoft and sold most of them at the right time. He now has a tax liability because he will have to pay tax on all the money earned. There is no point putting more into RRSPs.
- If you might be in a higher tax bracket in the near future, an RRSP contribution works as a tax deduction against your income. Any deduction saves you money in tax equal to whatever your marginal tax rate is. For example, Betty earns $43,000. She expects that her income i will rise to $48,000 next year because she is working in a new job. Say the tax bracket cutoff (where you move from one bracket to another) is $45,282. If Betty claimed a $1,000 contribution this year, the deduction will be worth 25 per cent. If she waited until next year to claim the contribution, she would save 31 per cent in taxes (because she is in a higher tax bracket).