RRSP decision criteria
Everybody’s financial situation is slightly different, but it’s funny to be reading the advice given in newspaper columns with respect to RRSP contributions. Some general rules:
1. If you have high interest-bearing debt (e.g. assuming you think you can get a 6% return on the market, if you are paying more than 6% on the debt), pay off the debt first and don’t bother with the contribution.
2. If your 2008 net income is $37,885 or under, don’t bother with the contribution. If you’ve already paid down your debt and really want to contribute to something, then consider putting the money into a TFSA. If your net income is slightly above $37,885, then contribute enough to your RRSP such that you bring your net income down to $37,885, and put the rest into the TFSA.
If you pass these two conditions then determining what to invest in is the challenge. Generally, put tax-disadvantaged investments inside the RRSP and TFSA. RRSPs are good for US income bearing investments (as they are not subject to withholding tax inside the RRSP). TFSAs are good for all other domestic income bearing investments (as foreign investments will still have withholding tax applied to them, reducing future gains).
Your #2 rule should be $35016 as that’s the first income bracket for BC tax rate.
This is a matter of debate, but I would disagree. The $35016 to $37885 tax bracket is 15% (federal) and 7.7% (provincial), a combined rate of 22.7%.
The next federal bracket is 22% (combined rate 29.7%).
Going from the basic rate (20.06%) to 22.7% is not much of a relief on taxation, but going from 20.06% to 29.7% is much more significant.