Many physicians look to the tax-advantaged benefits available through registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs). But to make the most of these savings vehicles, it’s important to know how and when to use them.
Using concrete scenarios, the following case studies show how physicians can fully capitalize on the tax advantages of RRSPs and TFSAs.
You may be able to relate to the examples or have unique circumstances of your own. Whatever your situation, you can maximize the benefits by using RRSPs and TFSAs in strategic ways.
Case study 1
Dr. Cruz, age 27, is a PGY1 resident earning about $60,000 per annum. 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 and contribute instead to a TFSA now. At her career stage, 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 later.
If Dr. Cruz has more cash to invest than her TFSA contribution room allows, she could contribute to her RRSP 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. Lee, age 38, is married with one child, and her spouse stays at home. She is thinking about contributing to a spousal RRSP for her husband.
A spousal RRSP would be a smart idea for this couple. Dr. Lee could use her RRSP contribution room and claim the tax deduction against her income. Her husband would own the plan and, when the time comes, he would be the one withdrawing the income.
The spousal RRSP can reduce the couple’s combined tax liability when she retires, because it can shift some income to him and level out their taxable income amounts. If Dr. Lee has more cash to invest than her RRSP contribution room allows, she could also gift money to her husband so he could contribute to his TFSA. This would increase their combined tax-sheltered investments. And because he would own the TFSA, that can also level out their taxable income in the future when they’re drawing on their investments.
Case study 3
Dr. Veilleux has a daughter, Chantal, age 40. Chantal is a public school teacher and expects to eventually draw a sizable pension. But she wants to save more so she can travel extensively during retirement.
Chantal’s pension contributions would reduce her RRSP contribution room, but they wouldn’t affect her TFSA contribution room. If she saved money in a TFSA, she could withdraw it tax-free during retirement, and it wouldn’t affect any income-tested benefits like Old Age Security (OAS).
On the other hand, if she had an RRSP/RRIF (registered retirement income fund), any withdrawals would be added to her annual pension. If her income is large enough, she could be subject to an increased OAS clawback. Chantal is better off saving in a TFSA.
Case study 4
Dr. McCurdy, age 45, has an incorporated medical practice. He notices that some of his colleagues are drawing money out of their corporation to put it in an RRSP or TFSA. Should he be doing the same?
For incorporated physicians, the question is whether to invest using mostly their corporate account or in an RRSP and TFSA as well. Considering recently changed tax rules around corporate passive income, RRSPs and TFSAs have generally become more attractive for incorporated physicians.
To create RRSP contribution room, Dr. McCurdy would need to pay himself a salary (dividend income does not generate RRSP contribution room). Drawing a salary would also reduce his corporation’s net professional income, which would increase the corporation’s ability to earn investment income without consequence. Contributing to his RRSP would reduce the size of Dr. McCurdy’s corporate portfolio, thereby generating less passive income, which would make the corporation less likely to be affected by the passive income rules.
Dr. McCurdy could also invest in a TFSA. If he took the money out of the corporation to contribute to his TFSA, he would pay tax upfront. But once the money was in the TFSA, all income earned within it would be tax-free, making it a powerful savings tool.
Over the long term, the benefits of getting tax-free earnings from a TFSA will often be greater than the current tax savings that a physician would get from retaining money in their corporation. However, if he had to choose one over the other, Dr. McCurdy should go with the RRSP first.
Case study 5
Dr. Vendel, age 62, wants to continue contributing to his RRSP to benefit from the tax deduction. But when he retires in a few years, he thinks all this RRSP/RRIF income will cause him to lose some OAS benefits, which concerns him. He has yet to open a TFSA.
Too much income is a far better problem to have than the opposite one! It may be best for Dr. Vendel to start drawing on his RRSP early; that way, his RRIF income won’t be so high when he is required to start withdrawing, and the impact on his OAS income may be reduced.
If drawing on his RRSP early would create excess personal money, Dr. Vendel could use a TFSA (he can contribute up to the accumulated contribution room) to avoid additional taxable personal investment income. In fact, a TFSA may begin as an emergency fund, shift to helping smooth out income from year to year, become a component of retirement income, and ultimately evolve into an excellent legacy tool.
Thoughtful planning and advice from MD Financial Management can help you save more and rest easier. Contact an MD Advisor* about making the most of your RRSP and TFSA contributions.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.