Author Topic: Take Bonus in cash or direct into RRSP  (Read 6958 times)

J.Milly

  • 5 O'Clock Shadow
  • *
  • Posts: 31
Take Bonus in cash or direct into RRSP
« on: June 05, 2015, 05:35:12 PM »
Hi guys. So I've gotten bonuses from work before but since being promoted its slightly higher now. I work part time while being in university. Last year I made 24k, this year I should make 30k gross. My bonus is $2200, and I'm allowed to direct 85% to my RRSP (the other 15% is used to pay QPP and EI premiums on total amount and then tax on the 15%).

If I take it as cash they withhold a big chunk over 30%. My RRSP are in TD emerald index funds MER are between 0 and 2 basis points. My concern is, am I wise to be using my contribution room at such a low salary? Any opinions would be great thanks!

fb132

  • Guest
Re: Take Bonus in cash or direct into RRSP
« Reply #1 on: June 05, 2015, 06:39:55 PM »
Since you are in the lower tax bracket, I would invest it in the TFSA. If you are really against putting in the tfsa, then the next best thing is to put it in your RRSP and the money you get from your tax refund, you reinvest it in the RRSP so it makes a snowball effect...meaning you will get that portion back the following year from your tax refund and so on.... Keeping it cash is a horrible idea due to inflation and little return over it unless you plan to go on a trip or some short term buy (like school tuition fees or buying school materials) and you would need that money in less than 5 years.

If you decide to put the money in the TFSA or RRSP, just make sure you have enough contribution room.
« Last Edit: June 05, 2015, 06:45:45 PM by fb132 »

lostamonkey

  • Bristles
  • ***
  • Posts: 454
  • Location: Canada
Re: Take Bonus in cash or direct into RRSP
« Reply #2 on: June 05, 2015, 06:52:35 PM »
You are getting confused between withholding taxes and actual taxes. It doesn't really matter how much they withhold, you will get back the difference between that and your true taxes at tax time.

I would suggest you take the cash, open a "self directed TFSA", contribute all funds that you don't need for living expenses/emergency fund, and buy Vanguard ETFs.

Cathy

  • Handlebar Stache
  • *****
  • Posts: 1046
Re: Take Bonus in cash or direct into RRSP
« Reply #3 on: June 05, 2015, 08:14:14 PM »
It seems to be a common misconception that current income level determines whether one should contribute to an RRSP. Unlike the less generous American retirement accounts, an RRSP deduction does not need to be taken in the same year as the contribution is made.

Section 145(5) of the Income Tax Act, RSC 1985, c 1 (5th Supp), provides that a taxpayer in computing income for a taxable year may deduct, up to the deduction limit, all contributions to RRSPs made after 1990 (so long as they were made before 60 days after the end of the taxable year), excluding certain contributions including contributions deducted in a previous taxable year.

Heckler

  • Handlebar Stache
  • *****
  • Posts: 1332
Re: Take Bonus in cash or direct into RRSP
« Reply #4 on: June 05, 2015, 11:48:28 PM »
I fully support taking my bonuses pre-tax to my RRSP instead of giving half to the guberment.  You'll never miss it, but it can grow every year.

lostamonkey

  • Bristles
  • ***
  • Posts: 454
  • Location: Canada
Re: Take Bonus in cash or direct into RRSP
« Reply #5 on: June 06, 2015, 01:37:28 AM »
It seems to be a common misconception that current income level determines whether one should contribute to an RRSP. Unlike the less generous American retirement accounts, an RRSP deduction does not need to be taken in the same year as the contribution is made.

Section 145(5) of the Income Tax Act, RSC 1985, c 1 (5th Supp), provides that a taxpayer in computing income for a taxable year may deduct, up to the deduction limit, all contributions to RRSPs made after 1990 (so long as they were made before 60 days after the end of the taxable year), excluding certain contributions including contributions deducted in a previous taxable year.
This is true but it does not consider the investment loss from delaying investing your refund.

Let me give a simple example to illustrate my point:
Joe is in the 25% (provincial+federal) tax bracket in both retirement and while working. Joe will contribute at the begining of year1 and withdraw at the end of year 5.
Let's say Joe has $10K to invest in post tax dollars. Let's also assume a 10% annual rate of return.

Joe can either:

1. Invest in a TFSA and at the end of year 5 he will have $10,000*1.1^5=16,105.10

2. Invest in a RRSP, claim the deduction immediately and invest the resulting refund in a RRSP. At the end of year 5, he will have ($13,333.33*1.1^5)*0.75=16.105.10

3. Invest in a RRSP, claim the deduction at the end of year 2, and invest the refund in a RRSP. At the end of year 5, he will have (10,000*1.1^5)*0.75+(3333.33*1.1^4)*0.75=12,078.83+3,659.88=15,738.71
« Last Edit: June 06, 2015, 01:47:26 AM by lostamonkey »

Cathy

  • Handlebar Stache
  • *****
  • Posts: 1046
Re: Take Bonus in cash or direct into RRSP
« Reply #6 on: June 06, 2015, 07:41:44 AM »
lostamonkey, if you assume, as your example does, that the tax benefit from the deduction will be the same in every year of your life, then obviously, you should take it earlier rather than later. However, in reality, the benefit can be greater in a subsequent year due to, e.g., higher income. With that in mind, it's very easy to construct examples where the net benefit ends up being higher by delaying the deduction to a later year. I'll leave the construction of those examples as an exercise.

I posted in this thread because the concept of deferring the deduction is especially relevant to people like OP. Presumably they won't be earning $30,000 per year forever. In a couple years they could be earning $150,000 per year instead, and the greater tax benefit at the new income level can more than make up for having deferred receipt of the tax benefit. Despite having low income this year, OP could still intelligently contribute to an RRSP today and then take the deduction once their income has increased.

If OP is barely saving any money, contributing to a TFSA doesn't hurt because they can always take a distribution from the TFSA and contribute the result to an RRSP in the future. However, if OP has enough money to contribute to both, they should definitely take advantage of the RRSP today, despite having low income. For an early retiree who will have low taxable income in retirement, an RRSP without ever taking the deduction is essentially more TFSA space (because the retirement tax rate will be close to 0%), albeit with less generous recontribution rules. The fact that you can take a deduction in a future year just makes it even better.
« Last Edit: June 06, 2015, 08:12:44 AM by Cathy »

J.Milly

  • 5 O'Clock Shadow
  • *
  • Posts: 31
Re: Take Bonus in cash or direct into RRSP
« Reply #7 on: June 06, 2015, 02:15:27 PM »
I do contribute regularly to my TfSA, about 20-30% of my pay using the CCP and TD e-series MF and 6% goes into my employer stock plan where they match up to a certain dollar amount.. I have cash sitting in it waiting for my auto purchases to take effect and dollar cost average it (should I be doing that or lump sum purchasing when I have extra cash?). So I guess that's my other question, I could always direct it right into my RRSP, they won't take the taxes and I could use the credit in a more advantageous year?