Putting all my chips into an RRSP | RRSPs and RRIFs | Discussion forum

Wise words from Top It Up. I feel somewhat similarly and am closer to 72 than you are.

It's actually a very complicated calculation, and if I knew who to send you to, to figure it out, I would!

Here are some of the considerations that have occurred to me. There may be others that are equally important.

First, do you have a spouse, and if so, what is their financial situation?

Consider perhaps just putting enough into RSP to maximize a certain tax bracket. If you put the whole 50K in at once, you may bring your tax bracket down too low, to the point where, when you take the money out later, it will cost you more than what you are saving now. Best usually to spread it over a few years. Depends on your income. Always remember that RSPs are only a tax deferral system. They only work well if the tax you pay later is less than what you would pay when you bought in. A lot of people are going to find themselves in the same situation either way - or even be paying more tax later.

Remember that when you turn 65, you will start to face a clawback on the "Age Credit" if income too high. On the other hand, you are not getting any Age credit now. You will also start getting OAS, which will add to your income and is taxable. When do you plan to start drawing on that? (Remember that if you postpone OAS to age 70, you can get up to 36% more annually.

Much depends on more details about your situation, which you may not wish to reveal, understandably
However, you can think about them.

Don't put more money into the RSP than you have income that you can deduct it from. Check on which kinds of income can be deducted from for this purpose.

Are you in a situation where, if you put more into RSP, you will face OAS clawback later when you take it out? That costs much more than the Age credit clawback. you probably don't want to go there.

How much are you earning now from seasonal work? Do you expect that to continue at the present rate? When do you expect to quit working entirely? Will there be some years between now and 72 when you can draw out this extra 50K or more from RSP and pay less tax on it than you would now? If not, you will probably never benefit from putting more in RSP.

You need to do the math, projecting out your taxable income from here forward, annually, based on what you know, with the two scenarios of RSP 50K or not. Don't just look at the tax you are paying now in isolation from what you might be paying in the future.

Are there any other foreseeable big changes in your financial situation? e.g. might you receive an inheritance? Are you carrying life insurance that you will drop in the next 10 years or so? Do you pay into disability insurance, which usually ends at 65.

What is your RSP invested in, and what sort of returns do you expect from it?

What is your own estate plan? Do you have someone that you want to leave your money to? If you have a spouse, and that person also has an RSP, the total asset in RSP after one partner dies can be quite substantial. It all gets taxed at marginal rate when the last of you dies, which can be very high and eat into your estate.

If interested, you might take a look at Daryl Diamond's book on retirement income planning. I have found it helpful.

What I did, to help myself with this predicament, is to set up a chart which lists every year from now to 100 years. Then I plotted the major changes that I anticipate in our financial situation - things over which I have no control but will change our income or available funds - so that I could see how total assets would change. Then I looked at income sources, when they would kick in, how much, whether splittable with spouse etc., to see the various combinations that were possible for me. And finally I looked at resultig taxable income and compared that to bracket threshholds.

I can't say I did this perfectly, but it gives me a rough idea. My conclusion was that although I have more RSP room, I won't use it.

Lastly, remember that government policies can and do change. The Liberal talked earlier about overhauling the entire income system for the elderly, but nothing has come of it yet. On average, with this in mind, I would stay away from RSPs. You should take advantage of anything that works for you while it is still available.

I pretty much agree with Loonie. I would take money out of my RSP's and stick it into TFSA's rather than the other way around. You're taking after tax, tax-free money and putting into a taxable RSP (when you withdraw) for tax gains now? Granted, the government of the day may totally change the rules by the time it's time to withdraw. About 8 years ago I took out a 60K mortgage to top up my rsp's. That's when I found out there is a max you can declare in a tax year before there is no financial benefit (refund) to contributing the max in one year. For me it was bout 20K, so, along with my regular contributions, it took me three years to deposit it all into RSPs for maximum benefit. I am in a similar situation to yours, will be retiring within the next 18 months, and my opinion is that the TFSA money will be the last money I ever spend. It doesn't count as "income" while RSP/RIF payments do. At least last time I checked. Max that sucker out and sit on it until I HAVE to use it or I die...Whichever comes first. Good luck whatever you decide.

PS.... aren't you having taxes deducted from your pensions now? Why the big tax bill every year?

Rick, I think Tony was thinking of putting his TFSA funds into his RRSP and from there into a RRIF. I believe RRIFs can just be funded by RRSPs, not that anyone would ever want to put funds from a TFSA to a RRIF anyway - can't see anyone rolling tax-free money into a RRIF and then paying taxes on the withdrawals.

Is it possible that your taxes aren't really exhorbitant, but it's just that you are having to pay a lot at once, which makes it seem worse?

Take a look at your Average Tax Rate and don't focus on the Marginal Tax Rate, in order to get a clearer sense of what your taxes are overall. The problem you have presented that you are dealing with right now is not one of Marginal Rate because you're not asking about adding more to your income now.
So, take the amount of tax you pay in total (not just the spring bill) and divide it by your total income (some would say net or taxable income, but I think total income makes sense.) Then multiply this by 100 to get your Average Tax Rate. This tells you how much you are paying annually on your income. It can actually be fairly reasonable if, for example, you earn up to about 50K, which is enough for most people to live on.
Perhaps the issue is just that because you have several sources of income, they are not all deducting the appropriate amount of tax during the year as they don't know what your total income will be.
If you end up owing more than 3K on a regular basis, CRA will make you start quarterly payments to them, which is a nuisance and sometimes more expensive due to lost interest or if you forget a payment. It's a smoother ride if you adjust deductions at source in my opinion. See if anyhting can be done from that angle and maybe you won't be so tempted to cash your TFSA!

The only reason I can think of where you might still want to put more in the RSP is if your pension plan is not good or is at risk or is not fully adjusted for inflation. It is probably a significant portion of your retirement income. If it's not a good or reliable plan, and you're planning on living to 90 or so, then you might want the larger RSP in order to compensate for its deficiencies and for future inflation.