# How to Estimate Tax Savings from RRSP Contributions

If you want to know how much tax you’ll save from a Registered Retirement Savings Plan (“RRSP”) contribution, or determine what an “optimal” RRSP contribution might be, there’s a simple equation you can use to figure it out.

Be warned that the equations described below only provide estimates of current-year tax savings, and do not take into account the affect RRSPs may have on your future taxes (for example, tax consequences when funds are withdrawn from the RRSP) or the benefits of temporary tax sheltering on investment interest or gains.

For readers looking for information on positives and negatives of contributing to RRSPs, the subject has been written about extensively online, so we’ve opted not to cover it here. Just remember that the pros and cons of RRSPs vary widely depending on the taxpayer’s current and future income and retirement needs.

#### Effective Tax Rate

To determine the effect a RRSP contribution will have on your current-year taxes, you’ll first need to know, or have an estimate of, your “effective tax rate”. Here is the effective tax rate equation:

`total tax payable / taxable income = effective tax rate`

For example, if a taxpayer earns \$100,000 of taxable income and pays \$22,000 in both provincial and federal taxes, their effective tax rate is calculated as (22,000 / 100,000) 0.22 or 22%.

Note that, if your current-year taxable income has changed drastically compared to the period for which you have calculated your effective tax rate, you may get a better result by estimating an increase (or decrease) to the effective tax rate calculated from the equation.

#### RRSP Tax Savings Equation

Now that you know how to calculate your current-year effective tax rate, you can use the RRSP tax savings equation to calculate your estimated tax savings on a given RRSP contribution. The equation is as follows:

`RRSP contribution * effective tax rate = effective tax savings`

For example, if you were to make a \$3,000 RRSP contribution, and your effective tax rate was 22%, the contribution would result in an estimated (3,000 * 0.22) \$660 of tax savings.

In theory, since Canada uses marginal tax rates, the result will always be an estimate. This is because in a marginal tax system, given how RRSP contributions work, your tax savings will always occur on your highest-taxed income. This means, in most cases, your tax savings will be slightly higher than those estimated with the above equation.

#### Optimal RRSP Contribution Equation

If you want to know how much to contribute to your RRSP to receive a given tax reduction, or tax refund, this next equation can help provide an estimate. However, be warned that the following equation does not take into account numerous other tax items that may impact your final tax calculation, nor does it take into account your RRSP contribution room, and so on.

Basically, use the following equation at your own risk, and please enter the estimate into your tax software of choice to ensure the contribution has the desired final result.

`desired tax savings or refund / effective tax rate = optimal RRSP contribution`

For example, if your draft tax returns shows you owing \$660 in taxes and you want to reduce your taxes owing to zero, with an effective tax rate of 22% you might consider making an RRSP contribution of (660 / 0.22) \$3,000.

Note that any RRSP contribution needs to be made before the cutoff date for the tax year in question. The cutoff date typically occurs at the end of February, two months after the end of the tax year for which you want to contribute. For example, according to the CRA website, March 2, 2020 was the deadline for contributing to an RRSP for the 2019 tax year.