To make the most out of the tax-advantaged benefits available through registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs), it’s important for you to consider what stage you’re at in your professional medical career and your personal circumstances.
To help you fully capitalize on the tax-deferred growth and savings of RRSPs and TFSAs, the following case studies account for key factors, such as age, career stage of physicians or non-physician family members, or specific financial goals and priorities. You may be able to relate to the examples or have unique circumstances of your own. The point is, you can maximize the benefits by using RRSPs and TFSAs in strategic ways. Learn more about the particular features of RRSPs and TFSAs, and how they compare.
RRSPs/TFSAs—Examples in action
Case study 1: Dr. Cruz, age 27, is a PGY1 resident earning about $56,000. She’s eager to pay down her student debt but also wants to start saving money.
Because Dr. Cruz will likely earn much more later in her career, she might want to delay contributing to her RRSP until she is in a higher tax bracket. Right now, she could benefit from the flexibility and accessibility of funds invested in a TFSA. She could even accumulate funds in a TFSA to make an RRSP contribution at a later date. Alternatively, Dr. Cruz could contribute to her RRSP during her residency but defer the deduction until she is in a higher tax bracket, when she can capitalize on additional tax savings, while continuing to grow her investment, tax-free.
Case study 2: Dr. Hoyano, age 38, is married with one child and her spouse stays at home. She wants to contribute money to a spousal RRSP for her husband.
Dr. Hoyano can contribute to a spousal RRSP and claim the deduction against her own income to the extent of her RRSP contribution room. This will also reduce the couple’s overall tax liability in retirement by levelling out the taxable income amounts. In addition, if you’re older than your spouse, a spousal RRSP allows you to continue contributions further into your retirement, since you cannot put money into your own RRSP after the end of the year in which you turn 71.
Case study 3: Dr. McCurdy, age 45, has incorporated his medical practice and pays himself through dividends. He wonders if drawing money out to put in an RRSP or TFSA is worthwhile.
Because he’s only paying himself dividends, Dr. McCurdy will not have generated any RRSP contribution room. But he can take full advantage of his TFSA contribution room. This will allow him to enjoy tax benefits by avoiding taxes on the investment earnings from funds held within his TFSA. Dr. McCurdy could also draw dividends while making use of the corporation’s notional account balances (when available) from, for example, a capital dividend account or a refundable dividend tax on-hand account.
Case study 4: Dr. Vendel, age 62, wants to continue contributing to his RRSP to benefit from the tax deduction. But he’s concerned that when he retires in a few years, his retirement income will place him in a high tax bracket
Dr. Vendel could fund a TFSA as well as an RRSP. Although he would not get the tax deduction for the TFSA contributions, he would benefit in retirement since TFSA withdrawals are not subject to tax. He can structure his retirement income withdrawals from each plan to pay the least tax possible and minimize the impact on his Old Age Security (OAS) benefits.
Case study 5: Mr. Gregory, age 50, earns $150,000 as a director at a hospital in Ontario, and is the brother of a medical practitioner and an MD client. He’s considering how an RRSP or TFSA can help him.
Most high earners benefit from RRSPs in their prime earning years because of the tax deferral. If Mr. Gregory contributes $26,230 to his RRSP (the maximum contribution allowed for 2018 based on his salary), he will reduce his taxable income by the same amount and pay less income tax overall. When Mr. Gregory withdraws the income in retirement, he is likely to be in a lower tax bracket, in which case he’ll pay tax at a lower rate. If Mr. Gregory is making his maximum RRSP contributions and has excess funds, he could also contribute to a TFSA to supplement his savings.
Case study 6: Mrs. Smith, age 45, is a public school teacher and is a family member of a medical practitioner. At retirement, she expects to receive a sizable annual pension. Despite the pension, she wants to save more to ensure she can travel extensively during retirement.
If Mrs. Smith saves money in a TFSA, the money can be withdrawn tax-free during retirement and it won’t affect any income-tested benefits. With an RRSP/RRIF, on the other hand, any withdrawals would be taxed as regular income. And when this income is added to her annual pension and OAS/Canada Pension Plan payments, it could surpass the OAS clawback threshold.
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