Delay Claiming the RRSP Contribution's Tax Deduction? (When Future Tax Rates are Expected to be Higher)
11 Pages Posted: 10 Jun 2015 Last revised: 29 Jul 2015
Date Written: June 9, 2015
When a Canadian expects to face higher tax rates in the future, where should savings be put? The standard advice is… ‘when you expect your marginal tax rate to rise in the future, contribute to a Registered Retirement Savings Plan (RRSP) now, but delay claiming the tax deduction’. This paper compares the outcomes between the choices to: 1. Keep the savings in a Tax Free Savings Account (TFSA) in the interim. 2. Keep the savings in a Taxable account in the interim. 3. Contribute to an RRSP and claim the tax deduction immediately. 4. Contribute to an RRSP but delay claiming the tax deduction.
The general conclusions are: • Using the TFSA is always the best option. Otherwise … • When the TFSA is full, using a Taxable account in the interim is best when the higher tax rate is expected shortly. • Contributing to an RRSP and claiming the deduction immediately is better when the interval is longer, or future tax rates are uncertain. • Contributing to an RRSP but delaying the claim is never the best option. It should be considered only when the savings have already been put into the RRSP (so that the first two options are not available), and the higher tax rate is expected shortly.
Keywords: RRSP, tax deduction, tax-deferred, TFSA, retirement savings, delay deduction
JEL Classification: J26, H24, H31, K34
Suggested Citation: Suggested Citation