Did you know that making Registered Retirement Savings Plan (RRSP) contributions can increase the benefits you get from the Canada Revenue Agency? This includes Canada Pension Plan (CPP) benefits. Making RRSP contributions can push you into a lower tax bracket, in which case you pay less tax on your CPP cheques — as well as all other taxable income you earn. The tax savings can be incredible.
In this article, I will explore how continuing to make RRSP contributions in retirement can boost your CPP income.
CPP is taxable
To understand how making RRSP contributions in retirement can boost your CPP benefits, you need to understand that CPP is taxable income. Many people think of CPP cheques as “free money,” but in fact, they are taxed like anything else. If you have a 29% marginal tax rate and collect a $700 pre-tax CPP cheque, you only collect $497 after taxes. Unless, of course, a large number of RRSP contributions push you into a lower tax bracket.
RRSP contributions lower your net income
The way RRSP contributions can boost your CPP benefits is by pushing you into a lower tax bracket. Let’s say you’re in Ontario, in the second-lowest tax bracket, earning $60,000 in non-CPP income. In this situation, you’d be paying marginal taxes of roughly 20% federally and 9% provincially.
Since your non-CPP income is above the Federal and Provincial cutoffs for the lowest tax bracket, every penny of CPP you get will be taxed at 29%. But if you make $20,000 worth of RRSP contributions, you get knocked down into a lower tax bracket and pay just 20% in combined Federal and Provincial taxes. So, to return to the previous example where you earn $700 in CPP, in this scenario, you’d collect $560 after taxes instead of $497.
You can keep making RRSP contributions all the way up until age 71, and you can draw CPP as early as age 60. So, there is no reason not to use the strategy outlined above.
What to do with your tax savings?
If you save money on CPP by making RRSP contributions, you can do whatever you want with the savings. One good idea would be to make even more RRSP contributions with the savings! Holding your shares in the RRSP lets you compound the capital gains and dividends tax free. When you finally go to withdraw, you may be in a lower tax bracket and pay lower taxes on the dividends.
Let’s imagine you’d held $10,000 worth of Fortis (TSX:FTS) stock at the beginning of 2023 and held it all the way to the end of the year. Fortis has a 4.37% dividend yield, which means that a $10,000 position would pay you $437 per year. Here’s how the math on that works:
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| Fortis | $54.06 | 185 | $0.59 ($2.36 per year) | $436.6/year | Quarterly |
Outside of an RRSP or Tax-Free Savings Account, you’d pay taxes on those dividends. For example, if your tax rate were 50%, you’d pay $127.93 (that is a 50% tax of $218.3, minus the dividend tax credit). Inside an RRSP, you would pay no taxes until it came time to withdraw, at which point you might have a lower tax rate. So, making RRSP contributions with your tax savings can make sense.
