Which savings plans should a 37-year-old with a military disability income contribute to, and when?

Q. I am 37 with a military disability income that will pay monthly until I die. Could you give your advice on which savings plans I should be investing in, and the order in which I should make my investments?

To date, I contribute to my and my spouse’s registered disability savings plan (RDSP), then our TFSAs. When I max out these savings plans, should I contribute to a RRSP, or should I use an unregistered trading account?
–Jason

A. Structuring your cash flow so that you have more money coming in than going out is an important first step in the retirement planning process. But once you have that extra cash flow, deciding the best ways to allocate it is not always simple.

I would generally prioritize paying off high interest-rate debt like credit cards before saving, but I will assume that is not a consideration for you and your wife, Jason. 

It sounds as though you both qualify for the disability tax credit (DTC), which is a requirement to open a registered disability savings plan (RDSP). 

Prioritizing your RDSP contributions first and foremost sounds like a good plan, given the generous incentives until December 31 of the year you and your wife turn 49. If your family net income from your 2019 tax returns is less than $97,069, you will be entitled to $3 of Canada Disability Savings Grant (CDSG) on the first $500 contributed, and $2 for every $1 contributed on the next $1,000. That means a $1,500 RDSP contribution will receive $3,500 of matching contributions from the government. That is a 233% return on investment right off the bat. 

If your incomes are lower—under $48,535—you may also qualify for different levels of Canada Disability Savings Bond money (CDSB) as well; this could result in as much as $1,000 a year of additional government grants to your RDSP account. 

RDSPs come with a lot of other intricacies, but suffice to say they are fantastic savings vehicles for disabled beneficiaries and their family members. So, I agree with your prioritization of your RDSPs, Jason. 

When you’ve maxed your RDPS contributions, a Registered Retirement Savings Plan (RRSP) can be a great way to save for retirement. One of the main factors that supports RRSP contributions is being in a high tax bracket, particularly if you think you may be in a low tax bracket in retirement. You save tax when you contribute to an RRSP, and will be taxed in the future (ideally, at a lower rate than at the time you contributed) when you withdraw funds from your RRSP to cover living expenses in retirement. 

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. 

I would not invest in a taxable non-registered investment account until your RDSP and TFSA are maxed out, Jason, and if your incomes are high enough, maybe not even until your RRSP contributions are caught up. 

After that, if you have a mortgage, paying down that debt may be a priority over investing in a taxable account depending on your risk tolerance, investment fees, mortgage rate, and so on. 

There may be situation-specific considerations that cause RRSPs or TFSAs to be preferable for you and your wife, Jason, in either a given year, or on an ongoing basis. So, I would caution you and any other readers to consider this advice as very general in nature and intended to spur on further discussion and deliberation. 

One thing is for sure: RDSPs are fantastic and under-utilized savings tools for young people with disabilities, and their loved ones. Information and knowledge about RDSPs are both woefully lacking, despite the fact the accounts have been around since 2008. You and your wife should leverage your RDSPs to the full extent possible given you both have several years before you turn 49 and the government grants stop. 

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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