Should I use up unused RRSP contribution room in retirement?

Should I add to an RRSP in retirement?

Bruce has $15K in unused room and wonders if it makes sense to top up his RRSP

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Q: I’m 70 years old, retired on a fixed income, and my tax bracket is not forecasted to change going forward. My question is, I have $15,000 in unused RRSP room. Should I contribute the $15,000 prior to converting to a RRIF?

—Bruce

A: The intent of an RRSP contribution is to make this savings amount taxable not now but much later on when you retire. This deferring of tax immediately shows up as lower income tax and/or a tax refund. This works in your favour if you are taxed in a higher income bracket when contributing then when you are withdrawing the taxable RRSP/RRIF for income.

Taxable Income Federal Tax Rate Taxable Income Ontario Tax Rate
$0 to $45,916 15.0% $0 to $42,201 5.05%
$45,916 to $91,831 20.5% $42,201 to $84,404 9.15%
$91,831 to $142,353 26.0% $84,404 to $150,000 11.16%
$142,353 to $202,800 29.0% $150,000 to $220,000 12.16%
$202,800 to over 33.0% $220,000 to over 13.16%
From Canada Revenue Agency website (Jan 2017)

You are permitted to contribute up to 18% of your gross income. Using up RRSP contribution room serves an excellent purpose of saving for retirement. You would be saving 18% of your income all the way through your working years. It’s a discipline many Canadians follow to the letter. If you do not use up the 18% annually, the remainder accumulates as unused RRSP contribution room. This room is not lost as it is forwarded to the next year and so on.

There could be occasions during your working years that your income is relatively low such as enrollment in school, change of career, job loss, etc. When income is lower it’s harder to save and RRSP contributions are not warranted because you have dropped to a lower income tax bracket. Remember – it’s only worthwhile if there is a difference in tax bracket between contribution year and withdrawal year.

Bruce is retired and settled into a fixed income. His RRSP contribution days are over even though there is unused available. The $15,000 number reported on his Notice of Assessment can and should be ignored. Saving dollars in Bruce’s TFSA or investment account would be a better choice.

Contact a financial planning professional if you need to organize a regular income for your retirement years.

Ask a Retirement Expert: Leave your question for Tom Feigs »

Tom Feigs is a certified financial planner and retirement expert in Calgary

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