How to maximize RRSP contribution room | Page 2 | RRSPs and RRIFs | Discussion forum

promise said
Thanks all for your feedback by the way I live in Toronto.

Based on my 120K income from 2019 I will look into planning to contribute amount of $22931 into my RRSP that should bring me up to the second bracket of over $92,825 up to $97,069 37.91%

I currently have maxed out my TFSA, I have $20K within my RRSP already and I also have a healthy saving account just sitting in a high saving account getting heavily taxed by the government as you all know with these saving account given my tax margin. I would like to invest the unregistered money I have in stocks to earn dividends and take advantage of the tax saving feature of dividends instead of saving account I just feel like we are at all time high in the stock market and I don't know if this a good time to get in the stock market so I been waiting on the side line.

My follow up question I have is since I would like to get your all take on since I am paying very low for rent given our current in environment in the real estate market being so high i know it's hard to time the market but would you say this is a good time to buy a place now or do you see any correction in the market in the next new few years which I don't mind waiting but I know the waiting in the past made me loose out on huge real estate gain people got.  

I believe renting is better than buying if the rent is low compared the cost of home ownership. I finally bought when my down payment was large enough to create a small mortgage. I have a friend that saved longer and paid cash for his place. Different strokes for different folks.

Kidd- these are great and accurate points to share but I don’t think the average person on this board or society is going to be making 220k in their retirement years. The whole point of the rrsp as you stated is to pay into it if you expect to be in a lower tax bracket in retirement. I am way too young to fully grasp the nuances of retirement planning so correct me if I am wrong. However, I have started to think about it now that I am working. I am sure if someone was maxing out their rrsp contributions based on a 150 k salary over 3O years they could be in this situation. However, they shouldn’t just be in RRSPs anyway If that’s their situation. As I’ve been told.

Bill said
I know one person who is making good money, not contributing so is building contribution room, and plans to fill it up to max when he quits because he's going to have large capital gains that year due to having to cash in his company shares. That's the plan, predicting the future is just a guess anyway, but that's his strategy for his particular situation.

Just a caveat for your friend -- having a lot of contribution room available to offset a large capital gain will certainly help his situation, but only up to a point. If we're talking about cashing out for a lot of money, then the Alternative Minimum Tax rules will kick in and limit the amount he can shelter in that particular year.

I used to be a big CEE investor using flow-through shares and had to frequently dance around the AMT when taking my write-offs, so I know of which I speak.

You can read up on all the gory details at your leisure, but the impact is that the AMT will require him to fund (pay) the tax payable on the excess (unshelterable) amount for that taxation year, until he can recover it in following years if as and when his income drops back to "normal" levels. So at a minimum he will need to be prepared to pony up a good chunk of tax in the year of disposal without being able to get that money back until the following tax year, or maybe longer depending on his taxable income situation at the time.

He may also want to talk to a tax pro to see if he can't find a better way to stage his exit

suburbs4life said
…The whole point of the rrsp as you stated is to pay into it if you expect to be in a lower tax bracket in retirement. …

One contributes to an RRSP if one expects to be in a similar tax bracket, plus any clawbacks, on average, or lower later as when one deducted the contributions.

If one ends up paying the same tax rate on the withdrawals, then the RRSP is equivalent to a TFSA. Detailed calculations are in this previous discussion.

The RRSP can still be better if one pays a slightly higher rate on the withdrawals.

In one case, $400,000 of contributions, deducted at 32½% average, with the $1.3 million of withdrawals taxed at an average of 40%, results in paying just 16.05% in taxes on the gain of $900,000. That would be the case outside the RRSP had the gains been capital gains.

Bill said
Londonguy, I don't think AMT will apply as there's no tax shelter, flow-through, deferral, etc stuff going on, as far as I know he just loads up on company shares every year as they are made available to him at FMV and he expects a large capital gain when he is forced to sell them back upon quitting. He also has a close relative who's a tax lawyer residenced in a tax haven so I imagine he'll run it by that person, probably already has. I know he's also mused about becoming a non-resident for that year, so maybe that RRSP plan he mentioned to me once will be superceded by another approach, I'm not really privy to his whole situation & latest thinking. But, for sure, thanks for the heads up, I'll pass it on to him.  

Just for the record, use of an exotic tax shelter doesn't have to be involved. Plain vanilla capital gains exemptions are also considered to be de facto shelter mechanisms (since you are supposedly "getting a break" by not paying tax on 100% of your gain).

Anyways, it sounds like he's getting professional advice so I'll assume he's planning this with his eyes open, which was my only motive in mentioning it.

The discussion in the attached link is directed mostly at farmers, but the COVID-19 housebound or anybody simply curious about AMT can get some basics here -- https://www.bakertilly.ca/en/btc/publications/the-evils-of-alternative-minimum-tax

Thanks, Norman1, sounds like some features of withholding "tax".

Bill said
I agree with Kidd's very useful summary, in much the same situation myself. Plus now there are TFSAs, options not available until recently so not part of now-seniors previous planning.

The key thing is you understand how RRSPs work, try to guess at what your retirement income will be assuming (assume you're at retirement age and it's now, that might help), and see if the tax deduction, plus the value of having that deduction available to you now, is worth the extra taxes later. It all depends on your situation, e.g. a gig economy worker is not at all comparable to a job-for-life-with-nice-pension unionized public sector worker.

I know one person who is making good money, not contributing so is building contribution room, and plans to fill it up to max when he quits because he's going to have large capital gains that year due to having to cash in his company shares. That's the plan, predicting the future is just a guess anyway, but that's his strategy for his particular situation. If you know how RRSPs work, that they have benefits and downsides depending on your situation, you can increase your odds of guessing right.

cruzinalong, renting cannot just be compared to the current cost of home ownership, I think a lot of people buy because they think prices will continue to rise until they can no longer afford to buy so they buy now as insurance.  

Yes I can agree with you somewhat. My friend waited until he could pay cash. He said he bought with cash before he could not afford to buy. He is doing fine today even though he purchased at a much older age than I.

cruzinalong said
… What if your friends do not have enough free money to make investments? I still think it is unique for each individual. If you are in the low income level NOW have non-sheltered interest, dividends and capital gains are valid possibilities. You can contribute your investment income to TFSA or RRSP.

One needs to careful with the RRSP if one is in a low income bracket now and will also be low enough in income when retired to qualify for the GIS pension.

The clawback on GIS will be 50¢ for each $1 of additional income. That will be like an additional 50% tax on any RRSP withdrawals then!

Such people will need to drain their RRSP's before they start collecting their GIS pension.