Are RRSP contributions worth it from age 60-70 with substantial rental income?

[K-ice]

I maybe could of asked the more general question, are RRSP contributions worth it with substantial rental income?

So my 60y old friend has $300K RRSP room. They have substantial rental income that is not expected to decrease.

I thought they should spend the next 10 years using up their RRSP room at $50K a year (6 years) and more contribution room will grow giving them another 4 years at $50K.

I then thought they could draw down roughly $25K a year over the next 2 decades.

The "problem" is that their RRSP, currently at $200K, will grow to almost 1M over the next 10 years with $50K added each year and assuming 3%.

At age 71 they will need to withdraw close to $50K per year according to current RRIF rules.

So any tax savings they had are now negated, even worse because they are taxed at base income + RRIF income  @ 47% marginal.

I found the numbers somewhat counter intuitive, maybe they really are better to not contribute. The numbers were somewhat better if the RRSP made 0%. The required RRIF draw-down was ~$35K/y,  but why would you not "invest" the money? 

They are already maxing their TFSA.

I know this is a MustacianPeopleProblem. Especially with other stable passive income sources like rent.   

Do some of you think RRSP contributions don't make sense?
 

[Goldielocks]

Starting at age 50-60, one needs to review the RRSP spend down plan for the next 30-40 years.
Whenever the income spikes, well above what you will draw in retirement, is a good year for RRSP contributions.*

If they have rental property, it is prudent to keep a large RRSP room for balancing capital gains income over many years.
For example, if they sell a property that has $600k in growth (net of Actual cost basis) , taxed at 50% cap. gains rate = $300k.
If their business does not have another way (incorporated, trust structure, offsetting expenses) to reduce this, they need to declare $300k in income.

This would be an ideal year to "hide" the $300k income in the RRSP and defer taxes until retirement...   Then they would spread out the taxes on it over many years, with a lower marginal rate.


But if the calculation about RRSP contributions is on income before age 70 under $90k/year today, versus a retirement income of $50k later, ** you are correct, that the advantages to putting $$s into the RRSP start to diminish... especially if they intend to leave an estate legacy after they die and hope to reduce taxes at that time.  These are generally the years to max out your TFSA first, then decide how much to put into the RRSP versus non-reg. based on your RRSP size :income ratio.

*NOTE:   Couples split RRIF income in retirement, so if they are drawing $50k / yr for two persons, that is actually only $25k/yr, per person, which will always be a lower average tax rate than paying income taxes on $90k/yr as employment income.

[K-ice]

Thanks I love the following tips.

Whenever the income spikes, well above what you will draw in retirement, is a good year for RRSP contributions.*

This would be an ideal year to "hide" the $300k income in the RRSP and defer taxes until retirement...   Then they would spread out the taxes on it over many years, with a lower marginal rate.

*NOTE:   Couples split RRIF income in retirement, so if they are drawing $50k / yr for two persons, that is actually only $25k/yr, per person, which will always be a lower average tax rate than paying income taxes on $90k/yr as employment income.

I hadn't thought about the Capital Gain advantage. They should probably sell a property or two and spend more time on a beach.

[Goldielocks]

Yeah,  I think of my RRSP as a way to spread out my income (and pay average taxes) across a lifetime..   Not mainly as a tax refund right now.

..Well, Ok,  that plus tax free growth (if you have 20+ years to go is significant) and employer matches...

[Missy B]

My question for them would be: how much net income are you getting from your properties compared with how much income you'd get if you invested that equity in eligible dividends at 5%?

There are always other considerations about whether you want to sell of course. But they can earn 55K each per year completely tax free as dividends, indefinitely, and never worry about how they'll take it out of their RRSP. Unless you're in a hot real estate market, the dividend play is probably the better choice, as far as returns go.