It may be tough to estimate your tax bracket in retirement without developing a long-term retirement plan, but if you are far enough away from retirement, and earning a high income, that long time horizon as well may help support RRSP contributions.
Now, what is a high tax bracket? My experience is that many retirees can structure their affairs to be in a 20% to 30% tax bracket. This is a very broad generalization, and some retirees can pay over a 50% marginal rate.
There is a federal tax bracket for 2020 that starts at $48,535 of income with 20.5% tax payable over and above this level. Provincial and territorial tax rates vary but can add as little as 0.9% (21.4% total) to 12.03% more (32.53% total). On that basis, it may be that someone with an income of over $50,000 per year should at least consider RRSP contributions for long-term savings.
Jason, it seems you are prioritizing tax-free savings accounts (TFSAs) before RRSPs; however, if your incomes are over $50,000, and especially if they are well over it, I think you should consider RRSP contributions.
Your disability income may or may not be taxable, so that is an important consideration in your case. The taxation of disability income generally depends on who paid the premiums for the disability insurance policy—the employer or employee. Employer-paid policies generally result in the disability insurance being taxable to the recipient.
Another vote in favour of RRSP contributions is a group RRSP with employer matching contributions or competitive investment fees. A generous employer match on your contributions may be enough to tilt the scales in favour of RRSP contributions regardless of your income.
TFSAs may be more flexible saving vehicles but, in the right circumstances, RRSP contributions may offer more lucrative savings options over the long term.
TFSAs can work well for short-term savings goals when withdrawals may be needed before retirement. TFSAs can even be used to make RRSP contributions. For example, when someone expects their income to increase in the future, or has an extraordinary taxable income inclusion from a bonus or other extraordinary situation, TFSA withdrawals can fund a RRSP contribution.
Jason, check back as to when you opened the RDSP. You can go back and make contributions for past years and may receive some additional RDSP grants or bonds.
Don’t open an RDSP at the big six Schedule A banks i.e. RBC, CIBC, Scotia, TD, National, BMO as they force you to buy their expensive and limited choice mutual funds.
Open an RDSP at the subsidiary of TD > TD Waterhouse Direct Investing as you get access to tons of low-cost ETF’s and any stock if you so wish.
I recently helped my adult daughter with a registered disability open an RDSP. From what I understand, she is not allowed to have an RRSP (an RDSP takes the place of an RRSP) and funds held in a TFSA would be included in the total amount she is allowed to hold in savings. We’re in B.C. Does this differ by province?
Response from the MoneySense editorial team:
Hi Nicole, thanks for asking.
Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected], where it will be considered for a future response by one of our expert columnists. For personal advice, we suggest consulting with your financial institution or a qualified advisor.