Contributing to an RRSP is always a great move, right?

Not so fast.

RRSPs reduce your taxes by sheltering income from tax when you contribute. You will pay the income tax later when you withdraw the funds, which is ideally when they’ve had a few years to grow (tax-free), and when you’re in a lower tax bracket because you’re retired or pulling back from your career.

Here’s what to consider when you’re trying to decide whether, and how much, to contribute to your RRSP.

The higher your income, the more you should contribute to your RRSP

This seems obvious. The more money you have, the more you should contribute. But that’s not actually the point here. In general, the higher your tax bracket is, the more money each dollar contributed to your RRSPs can save you. If you’re earning more than $50,000/year you should think about sheltering some money from tax by making an RRSP contribution.

If you’re a higher-income Canadian earning $100,000 or above, an RRSP is practically a must. That’s because any income above $100,000 is taxed at a higher rate than the dollars below that point, so it’s a great idea to shelter at least some of those top dollars from tax.

If you’re moderate- or low income, contribute less (or not at all) to your RRSP

If you’re earning less than $50,000 per year, the tax savings per dollar contributed to an RRSP can drop. While saving for retirement is usually a good idea, RRSPs aren’t necessarily the best route if your income is low. Consider setting that money aside in a Tax-Free Savings Account (TFSA) or even in a simple savings account in case of emergency.

Later when your income is higher and an RRSP contribution begins to make better financial sense, then you can take what you’ve saved and put it in an RRSP for maximum oomph.

What if one of you has high income and one of you has low income?

If you and your spouse have incomes that place you into separate tax brackets may be time to think about spousal RRSP Contributions.

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