Part of the complex issues around saving for retirement is people trying to give advice that works for everyone. The problem with this is there is no advice that always works for everyone. There always seems to be an exception.
So today I’m going to take a crack on suggestions on what do with your money at various income levels. For simplification purposes I’m going to use a person in Saskatchewan as an example.
Income Level 1 ($0 to Basic Personal Deduction)
Well down here at the bottom rung of the ladder it often appears bad at first glance. Despite this weird belief otherwise, having some one in this situation is actually useful for tax purposes and cost savings in a family. If you can claim your spouse as a dependent you can save tax on the working partner’s income. Also a person at this level can provide additional tax saving by running a small business out of the home (deduct house bills and expenses for the business). Additionally a person at this level can assist in cost saving to the house by having more time to comparative shop and saving on child care expenses. Also depending on your overall family income you might qualify for extra RESP funding and other helpful government programs like the GST rebate. Obviously a RRSP contribution is useless at this point (no tax savings), but a spousal RRSP might be useful.
Income Level 2 (Basic Personal Deduction up to $37,178)
Now in this income level you will most likely want to avoid RRSP’s as you likely to be in the same tax bracket in retirement. So an approach of investing in dividend paying stocks might be more useful since you won’t be paying any tax on the dividend income. The other good idea at this level is to try to save something every month. It can be hard, but if you stay out of credit debt and start getting into the habit of saving you will be light years ahead of most people. Also you might want to avoid interest income as if you don’t have an RRSP you will be getting taxed at you full marginal rate.
(Note: There is technically another bracket of $37,178 to 38,405, but I’m going to skip this one.)
Income Level 3 ($38,405 to $74,357)
At this stage an RRSP contribution is starting to look useful, especially is you can use it to drop yourself back to Level 2 for income tax purposes. You are also now typically earning enough money to manage a comfortable lifestyle for a family, so if your near the middle to top of this range you can start to practice that old strategy of living below your means. Basically if you earn $50,000 a year, live like you earn $45,000 and you will always have some savings. If you can live like you earn $40,000, better yet for your savings. The trick here is to find that balance point where you are happy with your savings without feeling deprived in the rest of your life.
Income Level 4 ($74,357 to $109,729)
Obviously at this income level you are doing well by most peoples standards, but don’t let that go to your head. Any interest/employment income you get marginal tax rate is getting eaten alive at 39%, so you might as well plow money into your RRSP’s and spousal RRSP’s (if your spouse is in a lower tax bracket) to get you back to Level 3 if possible.
Income Level 5 ($109,729 and higher)
Once you hit this level of income your marginal tax rate on employment/interest income jumps to 41%. At this stage if you can’t drop yourself down to income level 4 or lower, you might want to consider discussing your situation with a tax professional to see if any others options like a family trust might be useful. The other thing at this level is to earn as much income as possible from capital gains and dividends which are taxed less than interest income. If it seems like I’m focusing a lot on taxes at this level, it is because it is your worst enemy to your income.
Well that’s my suggestions by income level. Obviously I can’t cover everything, so if you have a great idea for any of the levels please leave a comment.
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