So the RRSP deadline (March 1st) has come and gone, and I elected to leave my savings in TFSA. That’s where we left off on my last post , where – generally speaking – if you think you’ll be in a higher tax bracket in retirement than you are right now (or think personal income tax rates will be higher), go TFSA. In-terms of after-tax dollars, it’s a wash until the differential on marginal tax rates is taken into account.
Oh, and by-the-way, I’m not a financial advisor. So all the usual disclaimers on that, don’t sue me, do your own due diligence (DD in Millennial). I have no idea what I’m talking about!
But – the other piece to factor in is Canadian Child Benefit (CCB), Goods and Service Tax (GST) / Harmonized Sales Tax (HST) refunds, and the Canada Education Savings Grant (CESG). Basically, the less “money” you make, the more of these benefits you get. And now that I have a baby, I have to start thinking about at least two of these things (CCB and CESG).
Omololu (2020) writes “because RRSP contributions are considered a tax deduction on your income tax return, they lower your taxable income and can increase the amount of CCB payments you are eligible for!”
Ok but how much?
Like personal tax rates, it depends on how much you make. For 2020, it starts at $6,785 per year (for children under 5, like my 5-month old). Then it rolls back as you make more money and have more kids, per the following schedule:
|Number of Children||Under $31,711||$31,711 to $68,708||Over $68,708**|
So carrying on in my 36% marginal tax example from my last post, let’s assume I grossed $100,000 in 2020. My wife grossed $50,000. But the above table uses net (take-home) pay, which was approximately $60,000 for me last year. And approximately $30,000 for my wife. So $90,000 total.
Without any RRSP contribution, my CCB would be approximately $3493.86. Free money from the government, showing up as a cheque each month. Not just a return on the interest-free loan we give the government each pay period (in the form of over-paid tax).
By contributing the $10,000 into an RRSP, my CCB goes up to $3813.87. Because I only made $80000. So an extra $320 a year, or just under $30 a month. Or an effective return of 3.2% on the $10,000.
This is quite interesting because before the TFSA / RRSP debate was solved by looking at your marginal tax rate now versus retirement. But in retirement I don’t plan on having children, so this 3.2% won’t exist.
Now that’s a pretty small number. Especially compared to how much the personal income tax changes as you move up in the brackets. However, if you plan to have more children (which I do), it becomes more exponential. Look at the Scenarios Omololu (2020) uses here.
In my case of $90000, once I have four children the difference becomes almost $1000 by contributing $10000 into an RRSP. So that’s an extra 10%, and (hopefully by then) I’ll be making more money, so I’ll be able to take advantage of the refund in a higher tax bracket.
And Occam’s Razor. I found out last week I was going to be bumped into a First Officer pilot position come April 1st. So having some cash available in a TFSA makes sense (versus locked away in an RRSP), especially with a baby and my wife on maternity leave (and also a cabin crew member who is current laid off). Overall, we are fairing well in these COVID times. Flourishing, actually, but that’s for another blog post.
Btw – I’m happy to pay taxes because we get things like maternity leave. My buddy took a high-paying flying job in overseas but his wife got $0 when they each of their kids. And they had to pay tuition for their kids to go primary school.
Oh, two other things. GST / HST credit -> the max you get back for a married couple is $592, varies with a bunch of variables but the main one is income (by the looks of things). Not a huge potato, less than 5% in our $10000 example. And CESG, you can get an extra 10% (to a maximum of $50) on Registered Education Savings Plan (RESP) contributions if you make less than $98,040. Even a smaller potato when talking about $10000 (less than half a percent).
The other frustrating thing is the RRSP deadline (March 1st) is the day after when your employer is required to get you your T4s (February 28th). So calculating this is quite difficult and timely, so I try to track it as I get my paystubs so I have a SWAG (millennial for estimation) on where I land in all this.
All that to stay, I’m sticking with TFSA for now.