Did you know that you can boost your Canada Pension Plan (CPP) benefit when you’re already receiving it?
It’s true!
Although the pre-tax amount of CPP benefits you receive is fixed 12 months after you start drawing your pension, you can increase your after-tax amount by claiming tax deductions. CPP pension income is just like any other form of income: the lower your tax rate, the lesser the taxes you pay on it. In this article, I will explore how to increase your CPP pension by up to $4,998 per year by making Registered Retirement Savings Plan (RRSP) contributions.
Make RRSP contributions
Before going any further, I should say that whether RRSP contributions are worth making depends on your age. You have to start withdrawing your pension at age 71. If you’re 70 already, you probably won’t earn a big enough return to make the RRSP’s tax-free compounding worth it. If you’re, say, 60, it may still be worth it to make RRSP contributions for another few years.
Your RRSP contribution limit is $31,560 or 18% of your income — whichever is lower. Most Canadians have at least $15,000 in RRSP contribution room in any given year. If your marginal tax rate is 33%, and you make a $15,009 contribution, you shave $4,998 off your tax bill — whether it be CPP tax, employment income tax, or something else. So, making RRSP contributions can save you a lot of money and give you a big tax refund.
How much money you could save
Above, I showed that you could save $4,998 by making a $15,009 RRSP contribution. That’s a significant savings. But, of course, that all depends on your tax rate being 33% and your contribution being $15,009. The amounts vary depending on your tax rate and contribution: the higher your tax rate and the larger your contribution size, the more money you save. For example, if you’re earning $300,000 in Ontario and make a $31,560 contribution, you save $15,780.
What to hold in an RRSP
Saving money with your RRSP is not JUST a matter of making contributions. You need to invest in your RRSP to get the most out of it. There are all kinds of assets you can invest in: Guaranteed Investment Certificates (GICs), index funds, money market funds, and more.
As far as individual stocks go, dividend payers like Brookfield Asset Management (TSX:BAM) often prove to be good RRSP holdings. Such stocks benefit from the RRSP’s tax-free compounding because their dividends come in on a regular basis. A stock that only offers capital gains may never be taxed even if you hold it in a taxable account, but a dividend stock always incurs taxable income each year.
The above logic applies to all dividend stocks. Brookfield Asset Management itself is a good example to work with because it has a high yield (3.7%) and is very popular with Canadian investors. Brookfield Asset Management’s popularity stems from its highly profitable operations (it has a 45% net income margin) and its steady track record of growing its profit and raising its dividends. Over the last decade or so, Brookfield has grown its book value by about 16% per year. It looks like BN’s management team is doing something right because their company is performing very well. So, the stock may be worth holding in your RRSP.
