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Optimizing your RRSP strategy according to your career stage

A mature couple biking outdoors.

With tax season approaching again, Canadian physicians need to think about strategies for optimizing their use of registered retirement savings plans (RRSPs). As you may know, an RRSP is an investment vehicle that allows contributions to be deducted from taxable income, up to certain limits. Contributing to RRSPs won’t allow you to avoid taxes entirely – it will, however, allow you to defer them.

It might seem that seizing any tax deduction opportunity would be a “no-brainer.” But the RRSP rules can be complicated, and the best strategy depends a lot on your marginal tax rate as you progress in your career, as well as on other personal and environmental circumstances. 

Understanding your marginal tax rate is critical to effective financial planning over your lifetime. Under Canada’s progressive system of taxation, the percentage tax that you pay increases as your taxable income increases. For 2022 for example, the federal tax rate is 15% on the first $50,197 of taxable income, 20.5% on the next $50,195, 26% on the next $55,233, etc. Note, you’ll also pay provincial or territorial tax.

Below are some examples of how your RRSP strategy could change over your career.

Medical student

As a medical student, you probably have little or no taxable income, so any tax deduction you might qualify for by making RRSP contributions would likely generate a small refund.

If you do have money available to contribute to a savings plan, a possible strategy would be to invest instead in a tax-free savings account (TFSA). You won’t get a tax deduction on the amount you contribute to a TFSA. But you can withdraw the funds tax free later, when your marginal tax rate is much higher or as your investment goals change to reflect new circumstances such as starting a family.

If you do want to start building your RRSP account, you can also contribute to it this year and claim the deduction in a future year.

Resident physician

At this point in your career, you’ve begun to earn some income, with your salary rising every year in residency. It’s possible that you’ll be earning your highest “known” income in late residency. If you do a fellowship following residency, your income could dip again. If you transition to practice and decide to incorporate, your personal income could also be lower. Therefore, the later residency years might be one of the best times to contribute to your RRSP. That’s because the higher your income, the higher your marginal tax rate; and the higher your marginal tax rate, the bigger the refund you’ll get from the same RRSP contribution. And if you believe your income will increase from where it is in late residency, you can contribute to an RRSP now and claim the deduction later, when your income is higher.

Another reason that you might want to start building an RRSP now is that you can withdraw funds from your RRSP (up to $35,000, if you qualify) to help you buy your first home. Further, from the moment you contribute to your RRSP, the investments you make within it grow on a tax-deferred basis, meaning no tax is paid on earnings, until the funds are withdrawn; at which time you’ll pay income tax on the withdrawal. Ideally, this will be in retirement — which  is many years away.

Practising physician

As a practising physician, you have a higher income than you did earlier in your life, and your personal situation is likely more complex. For one thing, you may have chosen to incorporate, in which case you’ll need to consider whether to take your compensation as salary, dividends or a combination of both. And your strategy will likely be based on your cash flow.

An accountant can advise you on the optimal amount of salary to draw as well as the potential for using RRSPs to mitigate the impact of passive income rules. You should also consider contributing to a spousal RRSP if your spouse is in a lower tax bracket than you are.

Retired physician

At this stage, your marginal tax rate may have declined, and after age 71 you’ll have to start converting funds from your RRSPs into a registered retirement income fund (RRIF) or annuities. But you can still keep contributing until the end of the year that you turn 71, as long as you have contribution room available. Moreover, you can contribute to a spousal RRSP as long as your spouse is younger than 72 and you have room to contribute.

Whatever stage of life you’re at, RRSPs are a great vehicle for deferring taxes—and for making sure you’re well prepared for a future beyond your income-earning years. It pays to take advantage of this opportune way to invest!

To best support your financial goals, you need a plan that considers the intricacies of your career in medicine, your personal circumstances, and the current environment. We can help determine the ideal strategy for you. Contact an MD Advisor* and discover the difference physician-focused advice can make.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.

The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.