Which savings plans should a 37-year-old with a military disability income contribute to, and when?
When you’ve maxed your RDPS contributions, a Registered Retirement Savings Plan (RRSP) can be a great way to save for retirement. One of the main factors that supports RRSP contributions is being in a high tax bracket, particularly if you think you may be in a low tax bracket in retirement. You save tax when you contribute to an RRSP, and will be taxed in the future (ideally, at a lower rate than at the time you contributed) when you withdraw funds from your RRSP to cover living expenses in retirement.
It may be tough to estimate your tax bracket in retirement without developing a long-term retirement plan, but if you are far enough away from retirement, and earning a high income, that long time horizon as well may help support RRSP contributions.
Now, what is a high tax bracket? My experience is that many retirees can structure their affairs to be in a 20% to 30% tax bracket. This is a very broad generalization, and some retirees can pay over a 50% marginal rate.
There is a federal tax bracket for 2020 that starts at $48,535 of income with 20.5% tax payable over and above this level. Provincial and territorial tax rates vary but can add as little as 0.9% (21.4% total) to 12.03% more (32.53% total). On that basis, it may be that someone with an income of over $50,000 per year should at least consider RRSP contributions for long-term savings.
Jason, it seems you are prioritizing tax-free savings accounts (TFSAs) before RRSPs; however, if your incomes are over $50,000, and especially if they are well over it, I think you should consider RRSP contributions.
Your disability income may or may not be taxable, so that is an important consideration in your case. The taxation of disability income generally depends on who paid the premiums for the disability insurance policy—the employer or employee. Employer-paid policies generally result in the disability insurance being taxable to the recipient.
Another vote in favour of RRSP contributions is a group RRSP with employer matching contributions or competitive investment fees. A generous employer match on your contributions may be enough to tilt the scales in favour of RRSP contributions regardless of your income.
TFSAs may be more flexible saving vehicles but, in the right circumstances, RRSP contributions may offer more lucrative savings options over the long term.