How do RRSP contributions impact CCB?

The RRSP is one of the best retirement investment accounts available to Canadians, but it can do more for you that secure your financial future.

You can claim RRSP contributions when you file your income taxes, reducing the amount of income tax you pay. But there’s another benefit: your RRSP contributions lower your taxable income, which increases the tax benefits you qualify for.

One of the largest tax benefits available to Canadians that can be increased with RRSP contributions is the Canada Child Benefit (CCB). If you are a family with children, putting extra cash in your RRSP not only gives you more retirement assets, it can give you more CCB, too.

Many people are excited about this, but let me temper your expectations: it’s not very much.

RRSP contributions definitely increase the CCB you receive, but by very little. Depending on your financial situation, it may not be worth it to put money you need right now in an RRSP. Many parents are already experiencing a cash crunch, and demanding they lock up thousands of dollars in an RRSP is too big of an ask for such a little return as slightly higher CCB.

How much do RRSP contributions increase CCB payments?

I did the math for incomes ranging from $30,000 to $200,000 and RRSP contributions ranging from $1,000 to $15,000. The end result? RRSP contributions have very little impact on your monthly CCB payments. Here are the results:

The table assumes you do not contribute more than the annual maximum to an RRSP of 18% of gross earned income. However, if you have unused RRSP contribution room from past years, you can contribute more. But doing so is probably not worth it!

Every $1,000 in RRSP contributions results in an increase of approximately $2.67 per month in CCB. That’s an 0.3% return on your money. Not great!

• Families earning less than $40,000 will receive no extra CCB by making RRSP contributions
• Families earning between $50,000 and $90,000 can receive a maximum of $81.67 in extra CCB per month by making RRSP contributions
• Families earning more than $100,000 can receive a maximum of $40 in extra CCB per month by making RRSP contributions

If you have more than one child, you will see slightly higher gains in monthly CCB with RRSP contributions. But we are only talking a few dollars or cents here, nothing substantial.

Families with incomes below $40,000 have absolutely nothing to gain by making RRSP contributions. Their taxable income is already reduced to ensure they are receiving the maximum CCB payments thanks to the dependent tax credit.

One important thing to note is that the calculations in the table above assume no other deductions. If you have other tax deductible expenses such as childcare, medical costs, moving expenses, or political and charitable donations, then RRSP contributions will do even less for you because you’ve already lowered your taxable income.

For most families with children, especially if those children are in daycare, there is virtually no incentive to contribute to an RRSP if your household income is less than $70,000. Certainly do not do so for the express purpose to increase your CCB payments. It’s simply not worth it.

But this isn’t to say don’t ever make RRSP contributions! You should absolutely make use of the Registered Retirement Savings Plan to invest for retirement. Just don’t do it believing it’s having a real impact on your Canada Child Benefit, because it’s not.

How do I optimize my savings as a parent?

One of the challenges of managing the finances for a household with children is there are a lot of demands on your income. This is especially true during the daycare years, where some parents will find childcare costs because the largest expense in their budget.

Prioritize your TFSA

While it’s tempting to put your child’s savings accounts before your own, it’s really important you don’t neglect your own retirement assets when you have a child. The Tax-Free Savings Account (TFSA) is on the best long-term investment account available to Canadians. Even if you do not max out the account each year, even setting aside $1,000 or $2,000 is incredibly valuable to your financial security long term.

To learn more about the TFSA and your contribution limits, check out The TFSA Explained.

Make sure to use the RESP

The main benefit of saving in a Registered Education Savings Plan (RESP) is the 20% match from the Government of Canada through the Canada Education Savings Grant (CESG). It’s free money!

In order to get the maximum CESG per year, you need to contribute $2,500 annually to an RESP. However, if you can’t afford that right now you can always catch up later.

Leave the RRSP until last, unless you have a very high income

Because a child will provide you with a dependent tax credit, as well as possible other tax deductions like childcare, you may not be in as much of a hurry to get the tax break from RRSP contributions. You can speak to an accountant to figure out exactly the optimal amount to set aside in savings, but you will likely find you can safely cool it on RRSP contributions and focus on the TFSA and RESP.

If you were told to strive for big RRSP contributions to increase your CCB, realize it requires very big contributions for very little benefit. You are likely better off keeping the money to boost much needed monthly cash flow, or at least top off the TFSA and RESP instead.