I have had a number of my clients calling me the last few weeks asking if they should top up their RRSP this year. I thought that I would review the process I go through with them to determine what is best in each individual situation.
Question 1 – Do you carry a balance on your credit cards each month? Credit card debt is between 18 and 20 percent. If you are carrying a balance on credit cards, you are probably better off paying down this debt rather than putting money into your RRSP.
Question 2 – What is your marginal tax rate? The higher your marginal tax rate for 2011, the larger the tax refund you will get from putting money into your RRSP. In general –“ more bang for your buck” the more money you earn.
Question 3 – Are you likely to need the money in the next two or three years? If you are likely going to take the money out in the next few years – you should top up your TFSA (Tax Free Savings Account) first. In 2012, you can deposit a total of $20,000 if you do not already have a TFSA account. If you do have an account and have never taken money out of it, you need to subtract the amount of money you have already deposited from the $20,000. If you have taken money out, the calculation is more complex – give me a call.
Question 4 – Are you likely to be a first time home buyer in the next few years? The Home Buyers Plan (HBP) lets you “borrow” up to $25,000 from your RRSP to acquire a home in Canada to be used as your principal residence. (This money must be repaid over a 15 year period.) If you are planning on buying a first home and don’t have $25,000 in your RRSP, it may make sense to top up now.
Question 5 – How old are you? The longer the money remains inside the RRSP, the greater the compounding that will occur.
You get a tax break when you put money into an RRSP. The money grows tax free inside the plan. However, you do pay taxes when you withdraw the money – so you need to think about what your tax bracket is likely to be later.
Do you have additional questions? Give me a call and we can work out the numbers for you.