Why isn’t there a magic number?

Let’s keep this really simple. Here’s how RRSPs work: You get a deduction when you contribute (meaning you pay less in taxes). Your investment grows tax-free while it’s in there. And then you’re taxed when you withdraw. The whole idea is to contribute when you’re in a high tax bracket and withdraw when you’re in a lower one, like at retirement.

One advantage comes from the difference between your tax rate at contribution versus withdrawal. But here’s what most people don’t realize: for most practitioners, the bigger benefit is simply that your investment grows tax-free.

So why is there no magic number? It’s actually really simple. Since the real benefit comes from having your investment grow over time, you should contribute as much as you can as early as you can. When people ask us how much to contribute, we tell them: as much as you can.

Here’s what makes this strategy even better: Let’s say you’re just over the threshold for your tax bracket. Instead of contributing just enough to drop down to the lower bracket, you can contribute what you can, and then deduct some portion this year and carry forward the rest to next year.

That’s right: Just because you contribute in a year doesn’t mean you have to deduct it that same year. You can deduct some or none of it, and then deduct whatever’s left in future years when your tax rate is higher. Or you could take the approach of deducting just enough each year to get you down to the next tax bracket. (And don’t worry, we’ll do all the number crunching when we prepare your taxes!)

The point is this: there’s not really a magic number because you can simply carry forward any “extra” contribution you make. The real benefit is in investing over a long period of time.

How do I figure out what I should contribute?

We always recommend that your RRSP decisions be part of a holistic retirement plan. You might want to engage a financial planner to help you envision what retirement will look like for you, and what you need to do now to get there.

You can use our three-step plan to help you decide how much to contribute.

Step 1: Is an RRSP right for me?

RRSPs are great, but they’re not always the best first choice. If you’re in a lower bracket – the lowest bracket is for incomes ~$60,000 and under – a TFSA might be a better choice. If you’re saving for your first home, an FHSA could be perfect.

On the flip side, if you’re eligible for the Canada Child Benefit, your RRSP contribution decreases your income taxes and increases your CCB amount. That’s extra money in your pocket.

And if you have high-interest debt – we’re talking credit card or payday loans – you should focus on paying those off first.

Read more about RRSPs vs. TFSAs vs. FHSAs here.

Step 2: What’s your contribution room?

Before you decide how much to contribute, check how much you’re allowed to contribute. That’s your maximum contribution room, and you can see it on your most recent Notice of Assessment or in your CRA My Account.

Think of this as your ceiling. You can contribute anywhere from $1 up to that amount.

Step 3: How much do you realistically have available?

This is usually the real limiting factor.

We recommend thinking about how much you’ll need for everyday expenses in the next twelve months and your emergency fund. The best strategy for RRSPs is to use money you don’t plan on touching for 10+ years. If contributing more would strain your cash flow or force you to dip back into the funds later, that’s usually a sign you should contribute less.

Putting it together

Once you’ve gone through those steps, you should have a reasonable range for what to contribute.

And here’s a pro tip: use the latest version of the Healthy Wealth Tracker, featuring our Tax Health section. You can enter your RRSP contribution and see exactly how much you’ll save on taxes. Play around with it and see what contribution feels most balanced to you.

Remember, there’s no perfect number. You should be proud of yourself for setting aside funds and starting your investing journey. Focus on that instead of obsessing over finding the exact right amount.