Author Topic: Upping RRSP contributions to increase CCB received?  (Read 1847 times)

ToTheMoon

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Upping RRSP contributions to increase CCB received?
« on: February 22, 2018, 09:31:46 AM »
Is anyone with kids considering upping their RRSP contributions in order to increase the CCB payments received?

I have come across a few articles on this, but do not have the bandwidth to figure out if there is a sweet spot (or a danger zone) when it comes to our effective tax rate.

This seems like a decent plan if you have RRSP contribution room, especially if you can then use the extra to fund their RESP and get the 20% match on top.

In what situations would this backfire?

With less than a week to go for 2017 contributions, I would love some insight into this!

Here are a few links about it:

https://www.planeasy.ca/canada-child-benefit-hidden-tax-rate/

http://www.knowledgebureau.com/index.php/news/article/helping-clients-deal-with-the-new-child-tax-credit

https://www.reddit.com/r/PersonalFinanceCanada/comments/4qnj24/using_rrsp_contributions_to_reduce_net_income_and/

Beard N Bones

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Re: Upping RRSP contributions to increase CCB received?
« Reply #1 on: February 22, 2018, 09:49:39 AM »
Is anyone with kids considering upping their RRSP contributions in order to increase the CCB payments received?

I have come across a few articles on this, but do not have the bandwidth to figure out if there is a sweet spot (or a danger zone) when it comes to our effective tax rate.

This seems like a decent plan if you have RRSP contribution room, especially if you can then use the extra to fund their RESP and get the 20% match on top.

In what situations would this backfire?

With less than a week to go for 2017 contributions, I would love some insight into this!

Here are a few links about it:

https://www.planeasy.ca/canada-child-benefit-hidden-tax-rate/

http://www.knowledgebureau.com/index.php/news/article/helping-clients-deal-with-the-new-child-tax-credit

https://www.reddit.com/r/PersonalFinanceCanada/comments/4qnj24/using_rrsp_contributions_to_reduce_net_income_and/

I think the idea is pretty simple - decrease your net income, and the Canadian government taxes you less and you get more benefits.  Its the double whammy.  This should be your goal year after year.  Furthermore, if you do use your RRSP and TFSA, those little green workers start to make money for you - year after year after year.  That is the "Snowball Effect"
In your case, max out your RRSPs year after year after year (especially if your net income is high; consider maxing out TFSA if you already have a low net income), and you will pay significantly lower income tax and get more government benefits.  I don't see a situation where you wouldn't max out your RRSP (unless your income tax rate is already really low, in which case you might want to use your TFSA). 

RichMoose

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Re: Upping RRSP contributions to increase CCB received?
« Reply #2 on: February 22, 2018, 11:18:35 AM »
The two big income numbers used for CCB are $30,000 and $65,000. If your adjusted family net income is higher than those numbers, the benefit is incrementally clawed back. (The actual claw-back rate is dependent on the number of kids.)

Do RRSP contributions increase your CCB? Sure, but remember CCB payments are one factor in a big government tax & benefit zoo. Do a calculation at various income levels to see how big the impact will actually be: https://www.canada.ca/en/revenue-agency/services/child-family-benefits/child-family-benefits-calculator.html

That said, it shouldn't backfire as a simple strategy unless your RRSP is really big, you have a big pension coming your way, and you plan to work until you're into your late 60s.

Are you saving in your TFSA accounts? What do you do with your tax refunds? How much do you earn relative to your spending? Do you have credit card or other high interest debt? Of course if you're a Mustachian, these might not be questions to worry about.

ToTheMoon

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Re: Upping RRSP contributions to increase CCB received?
« Reply #3 on: February 22, 2018, 01:07:43 PM »
***Removed personal info***
« Last Edit: March 01, 2018, 11:22:54 AM by ToTheMoon »

RichMoose

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Re: Upping RRSP contributions to increase CCB received?
« Reply #4 on: February 22, 2018, 01:34:32 PM »
Ok, so good financial situation with low expenses. That's typically a nice factor for RRSP use.

I would agree that the real question is bigger CCB with RRSP contributions vs. fill the TFSA. This is where you should use the CCB payment calculator. If you fill your TFSA, that money compounds every year. For example, filling both TFSAs now and contributing $11,000 per year for 20 years at 5% return would result in a total TFSA value of $650,000 with $325,000 of that amount being investment returns.

On the other hand, if you defer the TFSAs, fill your RRSPs and reinvest the CCB for kids education, your RRSP will grow to $1.6M in 20 years. (Assuming you contribute 18% of $76,000 annually going forward). That's getting pretty big and could result in withdrawals that are twice your annual spending once you turn 71.

I know this isn't a clear answer to your situation, but it gives you an idea of how to do some of the math. It's probably best to plot the RRSP contributions (and bigger CCB) going forward 12 years to when you get cut off CCB. Then factor in continued RRSP growth with less contributions or a more conservative return estimate. Then calculate your taxes and possible mandatory withdrawals when you retire.
Then calculate the potential TFSA value if you maximize that now vs. filling that in 12 years. Figure out the difference that would make to your TFSA value when you retire and start drawing down your portfolio (maybe in your early 60s). Remember, TFSA withdrawals are tax free and could set you up for seniors benefits later (OAS, GIS, pharmacare, etc.)
Then add any business value and how that could realistically impact your portfolio in retirement.
If the CCB benefit outweighs those future taxes, definitely go with RRSP. If it's close, maybe split the difference. If it's not close, go with TFSA now.

You might want to get a good fee-only financial planner on board to help with this as well. They could provide a lot of value when it comes to taxes, business sale to investment portfolio transitions, and other financial stuff. They might also have a better understanding of your personal finance situation than a typical small business accountant.
« Last Edit: February 22, 2018, 01:36:50 PM by Mr. Rich Moose »

Prairie Stash

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Re: Upping RRSP contributions to increase CCB received?
« Reply #5 on: February 22, 2018, 01:52:19 PM »
You mentioned RESP, that's a complication. Ideally its $2500//kid/year for 14 years each (maximum grants). I'm doing 10 years myself, my children will save the rest when they get jobs as teenagers. I see my RESP debt as $25,000/kid that way, spread over a decade (that's the basic idea, modify it for your own needs).

This year, bring your net family income to ~$46k. THat will maximize your RRSP refund and CCB benefits for the year. Use some of the refund to hit a $5k RESP, the rest for TFSA. For the rest of the year put all cash into the TFSA.

In February 2019, pull cash from the TFSA and fill the RRSP again. You should not hold $30k in cash outside a TFSA when you have room in the TFSA. That's a rule, learn to follow it. Because of your mistake you now owe interest on the cash, because you had it in a high interest account...right? (tough love here, I'm nicer in person).

Here it gets interesting. Who has the income? You or your husband? It matters when you reach the end of your registered room. If you have no income and collect all the CCB you can invest it all in a non-registered account that's taxed solely in your name...at a 0% tax rate.

Also the split on the RRSP is important for early withdrawal. If you retire early, a spousal RRSP is the way you get split income. Retire at 65 and it doesn't matter.

ToTheMoon

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Re: Upping RRSP contributions to increase CCB received?
« Reply #6 on: February 22, 2018, 10:06:05 PM »
Thank you both - that is a lot to digest.

You mentioned RESP, that's a complication. Ideally its $2500//kid/year for 14 years each (maximum grants). I'm doing 10 years myself, my children will save the rest when they get jobs as teenagers. I see my RESP debt as $25,000/kid that way, spread over a decade (that's the basic idea, modify it for your own needs).

We hope to resume RESP contributions soon.  We have about $37K in the family account, but I need to call and find out how much contribution space we have to catch up on.  We stopped a couple of years ago when my DH took a "sabbatical" year off of work, and then the following year I had a medical incident that required him to hold down the fort at home for over 8 months, so we had another very low income year.  Things are looking up though! :D 

If we are able, I would like to get the kids the maximum grants.  We have no intentions of subsidizing school completely - we are proponents of having skin in the game.  I am not even sure what post-secondary will look like in another decade from now - Will 4 years away at a brick & mortar school even be a thing anymore?

This year, bring your net family income to ~$46k. THat will maximize your RRSP refund and CCB benefits for the year. Use some of the refund to hit a $5k RESP, the rest for TFSA. For the rest of the year put all cash into the TFSA.

For the sake of simplicity, I like this idea.  It will lower our taxable income for the 2017 year, and then I have time to get us sorted for 2018.

In February 2019, pull cash from the TFSA and fill the RRSP again. You should not hold $30k in cash outside a TFSA when you have room in the TFSA. That's a rule, learn to follow it. Because of your mistake you now owe interest on the cash, because you had it in a high interest account...right? (tough love here, I'm nicer in person).

I have only had this cash in our account for the last couple of weeks. :)  I recently sold off our taxable account and paid out the investment loan we had.  Our mortgage is up for renewal this year and it will be easier to shop it without the large loan attached, we have been wanting to simplify our finances and regroup, and the market having been strong was the final incentive to cash out.  I lucked out with the timing and pulled the pin just before the drop started.  We will owe some cap gains for 2018, but not a lot as our basis reset within the last couple of years when we bailed on our FA and moved into index ETF's.  Point taken about keeping too much cash however - I do need to do a better job of keeping less in our chequing (not even HI savings - cringe) account.  Keep the tough love coming!

Here it gets interesting. Who has the income? You or your husband? It matters when you reach the end of your registered room. If you have no income and collect all the CCB you can invest it all in a non-registered account that's taxed solely in your name...at a 0% tax rate.

This is also interesting.  I usually work a few hours a week outside of our business and pull in around $10K from that job.  Otherwise we income-split via dividends from our company.  The 0% tax rate wouldn't apply even if our company didn't pay me, as I am too close to the basic personal amount just with my outside job, correct?

According to this article http://business.financialpost.com/personal-finance/taxes/understanding-the-new-canada-child-benefit-and-other-tax-tips-for-parents we could also gift the CCB income and invest it in the child's name.  I am not sure I am that nice of a parent. :)
 

Also the split on the RRSP is important for early withdrawal. If you retire early, a spousal RRSP is the way you get split income. Retire at 65 and it doesn't matter.

A his, hers & spousal RRSP are included in the total in the above post.  I'm not 100% certain of what I am doing yet - but am slowly getting a handle on things.  Thank you so much for taking the time @Prairie Stash - both here and elsewhere on the forums!
« Last Edit: February 22, 2018, 10:07:48 PM by ToTheMoon »

ToTheMoon

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Re: Upping RRSP contributions to increase CCB received?
« Reply #7 on: February 22, 2018, 10:12:08 PM »
You might want to get a good fee-only financial planner on board to help with this as well. They could provide a lot of value when it comes to taxes, business sale to investment portfolio transitions, and other financial stuff. They might also have a better understanding of your personal finance situation than a typical small business accountant.

This is a very good idea.  Our former FA was quite good - and has now gone fee only.  I wonder if he would take us back for cash, or if I should seek out someone new.  Can't hurt to ask I suppose, though I do not deal with rejection well. :)

okits

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Re: Upping RRSP contributions to increase CCB received?
« Reply #8 on: February 22, 2018, 11:00:36 PM »
As mentioned already, it really matters when you plan to start withdrawing from the RRSP and the tax rate you'll face then (vs. now).  I de-registered some RRSP investments last year, even though we'd lose 5.7% of the value in CCB, because my income was so low I paid zero tax other than losing the CCB.  Worth it to remove the tax liability from those assets. 

Why don't you contribute the full $30k, then take some time to figure out your optimal solution?  You don't have to deduct RRSP contributions in the year you make them.  As long as you haven't exceeded your allowable contribution limit, you can leave the deduction unused for a future tax year.

snacky

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Re: Upping RRSP contributions to increase CCB received?
« Reply #9 on: February 24, 2018, 08:55:59 AM »
Can I do a mini case study here and get some help? I want to maximize my child tax benefit and tax return, not just this year but for the next 6 (when my oldest turns 18 and the child tax benefit starts to go away)

Net income ~53k, two kids. $26k RRSP space, $27k sitting in a bank account waiting to be sent to either my TFSA or my RRSP.

Do I max out my RRSP space? Would putting in less and contributing evenly going forward make more sense?
Should I contribute to make my taxable income exactly $30k?
« Last Edit: February 24, 2018, 09:10:48 AM by snacky »

Lews Therin

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Re: Upping RRSP contributions to increase CCB received?
« Reply #10 on: February 24, 2018, 10:11:24 AM »
Snacky: For your situation, I would contribute exactly to 30k like you said, since past that you will be in the same tax bracket for income, and it won't increase your return past the 30k point. (so 23k this year, fill the RRSP next year). I'd go 23k RRSP, then put the return and the rest of the money into TFSA, then fill the RRSP next year.

How much space left in the TFSA?

Unless someone wants to do the math of the difference in a single year's investment into RRSP. Just a sec, I'll go pick that out, and modify my answer. (The link I will add will calculate if it's worth adding more RRSP in a single year, or waiting for the next year)

Updated link.
http://www.retailinvestor.org/rrsp.html#delay

Unless the link says that putting it in immediately is better (which seems unlikely, since at 31k your income is now in the lowest tax bracket, and CCB is as low as it will go) Take CCB into account as well when using the calculator.

« Last Edit: February 24, 2018, 10:35:35 AM by Canadian Ben »

okits

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Re: Upping RRSP contributions to increase CCB received?
« Reply #11 on: February 24, 2018, 11:14:20 AM »
@snacky , how much of your income is rental income (which creates RRSP contribution room for future years)? 

snacky

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Re: Upping RRSP contributions to increase CCB received?
« Reply #12 on: February 24, 2018, 11:35:38 AM »
@snacky , how much of your income is rental income (which creates RRSP contribution room for future years)? 

$11,900 is rental income. It will be more in 2018.
But disability insurance and CPP disability are both taxable income as well, so I think they contribute to RRSP room, right?

Ben, that was super helpful. As usual. Thanks, dude!

okits

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Re: Upping RRSP contributions to increase CCB received?
« Reply #13 on: February 24, 2018, 11:54:41 AM »
@snacky , how much of your income is rental income (which creates RRSP contribution room for future years)? 

$11,900 is rental income. It will be more in 2018.
But disability insurance and CPP disability are both taxable income as well, so I think they contribute to RRSP room, right?

Are the disability insurance benefits you receive from a government program, or from a workplace program (you paid the premiums/employer paid)?  The few explanations I looked at for "earned income" didn't mention it, but I could dig deeper to be sure (or, check your 2016 tax return to see how they calculated new RRSP contribution room).  The CPP disability pension income does create RRSP contribution room, so that helps!  The angle I am considering is this: from this link, the MB 2017 marginal tax rates for regular income:

first $31,465                         25.80%
over $31,465 up to $45,916   27.75%
over $45,916 up to $68,005   33.25%

https://www.taxtips.ca/taxrates/mb.htm

You get the biggest benefit reducing your income from $53000 to $45916 (+13.5% CCB and not paying the 5.5% higher marginal tax rate).  From $45916 to $31465 you still get the additional CCB but no differential in the tax brackets.  If you won't have RRSP contribution room to get you into that second bracket each year, it might make sense to save some of the RRSP deduction for future years so you get the 19% benefit, versus deducting it now for just the CCB increase.  If you're getting 18% new contribution room on most of that $53k income then you'll be fine for that part.

snacky

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Re: Upping RRSP contributions to increase CCB received?
« Reply #14 on: February 24, 2018, 02:00:36 PM »
Disability insurance is a workplace program I paid into. I get a T4 for it. I predict that my 2018 taxable income will be about the same as 2017.

I feel dumb because I can't figure out if it's better, dollar-wise, to use RRSP contributions to reduce my income to $31,465 or to $45,916. If looks like $45 means $2k less back in my return and $200/ month less in CCB. It makes 2017 and 2018 more even in terms of taxable income and benefits, right? So which is better?

Lews Therin

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Re: Upping RRSP contributions to increase CCB received?
« Reply #15 on: February 24, 2018, 02:48:53 PM »
Will you be able to bring your taxable below 45k next year if you go down to 31k this year? If yes, there is no point in splitting half half, since it's the same % you are saving (you are at the same marginal rate for both years) so you might as well take it all now.

snacky

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Re: Upping RRSP contributions to increase CCB received?
« Reply #16 on: February 24, 2018, 04:07:27 PM »
I spreadsheeted the shit out of it, with help from the federal calculator. If I stretch out my contribution room to keep my taxable income at 45,000 for the next four years I get more CCB than if I pay it all this year.
I didn't see the impact on my tax return because that is mathier than I can do.
Thanks for explaining this stuff to me, guys.

Lews Therin

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Re: Upping RRSP contributions to increase CCB received?
« Reply #17 on: February 24, 2018, 04:41:52 PM »
Don't forget to keep that money invested. (be it RRSP or TFSA)

snacky

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Re: Upping RRSP contributions to increase CCB received?
« Reply #18 on: February 24, 2018, 04:47:49 PM »
With a ~70% savings rate I'm pretty sure I can handle that one. ;)

Prairie Stash

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Re: Upping RRSP contributions to increase CCB received?
« Reply #19 on: February 26, 2018, 10:40:37 AM »
Can I do a mini case study here and get some help? I want to maximize my child tax benefit and tax return, not just this year but for the next 6 (when my oldest turns 18 and the child tax benefit starts to go away)

Net income ~53k, two kids. $26k RRSP space, $27k sitting in a bank account waiting to be sent to either my TFSA or my RRSP.

Do I max out my RRSP space? Would putting in less and contributing evenly going forward make more sense?
Should I contribute to make my taxable income exactly $30k?
Every year you get 17% of you income as RRSP room for next year. Without considering pensions or other factors that may use RRSP room, the optimal amounts are:

(0.18)*$53k=$9,540 plus $26k/6 years=$4333 for a total of $13,873.

Basically you want to use up your predicted annual increase in RRSP room and equal parts of the other room, that keeps the math simple. This is not an exact amount, I don't know your province for tax brackets. It would also be appropriate to contribute between $7-22K, basically enough to ft into the range of optimal tax planning, the goal is to use up all the room.

This is all dependent on you earning the same amount each year for 6 years. If there's a chance your income will go up over the 6 years, put in closer to $7k. If it might go down, put in closer to $22k.

To further refine, lets pretend you have $30k in TFSA room. Over 6 years you want to put in $10,500/year ($30/6+$5500 annual limit). If $27K is what you can save every year, the optimal RRSP is now $27-10.5=$17.5k, assuming income and tax brackets remain constant. $17.5k fits into the range ($7-22k), everything works out great. In 6 years both accounts are maxed and you have maximum tax breaks.

I'm ignoring RESP, those are also pretty cool if you want to play with them. You can contribute to those, get the matching, then pull the contributions out and use that to fund your RRSP/TFSA in year 7. It lessens your personal stash but the 20% CESG and the gains from your contributions can fund the child's education.