True or false: when you contribute to an RRSP, you have to claim the tax deduction for the same year. Answer: False. You can report a contribution in one year and claim the tax deduction in another.
The ability to separate the two provides some benefits.
Here is one. If your income is less than $41,000 in 2009 and you know it will be higher in 2010 (say because of a new job), you might be better off not taking the tax deduction this year. Someone in Ontario who made $30,000 in 2009, and expects to earn $60,000 in 2010, should defer their deduction until 2010 when they will get a 31% refund instead of only 20% if they deducted it this year, says Talbot Stevens, a London, Ontario-based financial educator, author and industry consultant.
Another way of benefiting is when you are making a large contribution (perhaps due to a windfall or a catch-up loan strategy). You generally should only deduct enough to get to the start of your current tax bracket, advises Stevens.
For example, if Sue earned $50,000 in Ontario for 2009, and contributed $15,000 to her RRSP, she should only claim a $9,000 deduction for 2009, to reduce her income from $50,000 to $41,000, where the 31.2% bracket starts. Below $41,000 the deduction is only 20% and below $10,300, its 0%. Thus, Sues leftover $6,000 would be better deducted next year at the 31.2% rate.
If you are earning less than $41,000 and dont expect to go higher, you might be better off saving for retirement with a tax-free savings account (TFSA). Youll give up the RRSP refund but then likely make up for it by avoiding clawbacks of the Old Age Security (OAS), Guaranteed Income Supplement (GIS), age credit, and means-tested benefits.
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Don’t deduct these RRSP contributions
By Larry MacDonald
True or false: when you contribute to an RRSP, you have to claim the tax deduction for the same year. Answer: False. You can report a contribution in one year and claim the tax deduction in another.
The ability to separate the two provides some benefits.
Here is one. If your income is less than $41,000 in 2009 and you know it will be higher in 2010 (say because of a new job), you might be better off not taking the tax deduction this year. Someone in Ontario who made $30,000 in 2009, and expects to earn $60,000 in 2010, should defer their deduction until 2010 when they will get a 31% refund instead of only 20% if they deducted it this year, says Talbot Stevens, a London, Ontario-based financial educator, author and industry consultant.
Another way of benefiting is when you are making a large contribution (perhaps due to a windfall or a catch-up loan strategy). You generally should only deduct enough to get to the start of your current tax bracket, advises Stevens.
For example, if Sue earned $50,000 in Ontario for 2009, and contributed $15,000 to her RRSP, she should only claim a $9,000 deduction for 2009, to reduce her income from $50,000 to $41,000, where the 31.2% bracket starts. Below $41,000 the deduction is only 20% and below $10,300, its 0%. Thus, Sues leftover $6,000 would be better deducted next year at the 31.2% rate.
If you are earning less than $41,000 and dont expect to go higher, you might be better off saving for retirement with a tax-free savings account (TFSA). Youll give up the RRSP refund but then likely make up for it by avoiding clawbacks of the Old Age Security (OAS), Guaranteed Income Supplement (GIS), age credit, and means-tested benefits.