The primary goal of using an RRSP is to defer current income to be able to draw that income
later in a lower tax bracket.
Not exact matches
Ten years
later in 2017, the marginal
tax rate for the
lowest tax bracket (up to $ 42,200 of taxable income) has fallen to 20.1 percent while the marginal
tax rate on highest
tax bracket (above $ 220,000 of taxable income) has risen to 53.5 percent.
Most households depend on a 401 (k) plan to save for retirement on the grounds that they receive a
tax deduction today and pay ordinary income
taxes when they take distributions
later, presumably when they are
in a
lower tax bracket.
Typically, if you're young and
in a
lower earnings
bracket than you expect to be
later in life, a Roth may make sense — you'll forgo
tax deductions now, but
later, when you're
in a higher
bracket, you won't pay
taxes on distributions.
When you're young, you may fall into a
lower tax bracket than you will
later in life, so pay the taxman now.
If you believe your
tax rate is
lower now than it will be when you start taking withdrawals, a conversion may look promising because you'll pay conversion
taxes while you're
in a
lower tax bracket and enjoy
tax - free Roth IRA withdrawals
later (when the higher
tax bracket won't matter).
If you believe your
tax rate is
lower now than it will be when you start taking withdrawals, a conversion may look promising because you'll pay conversion
taxes while you're
in a
lower tax bracket and enjoy
tax - free Roth IRA withdrawals
later (when the higher
tax bracket won't matter).
Reminder: The RRSP is beneficial
in two basic ways: it provides
tax - free compounding of your investments, and lets you contribute with pre-
tax money, so you can engage
in tax arbitrage by deferring the
tax until
later, when you might be
in a
lower tax bracket.
* deferment of some income
taxes until
later years when the holder is presumably
in a
lower tax bracket.
Or you could take the Roth option if you expect to make more money
later and pay the
taxes now while you are young and presumably
in a
lower tax bracket.
That,
in a nutshell, is what makes RRSPs better than TFSAs for higher earners: Not only are you
taxed on your money years
later, but because you're
in a
lower bracket when you retire, you'll pay less
tax too.
If that's likely, you may want to accelerate income into 2017 so you can pay
tax on it
in a
lower bracket sooner, rather than
in a higher
bracket later.
So there may be a case for pulling money from RRSPs if you occupy
lower tax brackets in your
late 50s or 60.
On the other hand, if you're
in a
low tax bracket today, you might consider a Roth now, when a
lowering of your gross income will not be as significant a
tax benefit as it might be
later on, if you find yourself
in a higher
bracket.
That will likely be years
later in retirement, when most Canadians enter a
lower tax bracket.
People
in low tax brackets who expect to
later be
in higher
brackets in retirement should clearly preference Roth IRAs to standard IRAs, and similarly there is a value judgment to be made about whether a 401k makes sense (even with the compounding) if you can only choose a lousy overpriced plan (as most of them are) AND believe your
tax rate will increase
in retirement.
Distributions can be withdrawn
later when the account owner is
in a
lower tax bracket.
(Noteworthy exception being pulling money out of a traditional IRA
in order to «fill up» a
tax bracket if you're currently
in a
lower bracket than you expect to be
in later.