How to handle an Inheritance

Zoomer | January 1st, 2006

Question: My husband will be receiving anywhere from $60,000 to $70,000 this year when his father’s estate is settled. To date my husband, who will be 49 this year, has no personal RRSP, although there is one set up through his workplace for him in which approximately $20,000 is vested.. His carry-over allowed by Revenue Canada for RRSP donations is over $47,000, while his income is less than $ 39,000. My question is this: would it better for him to put $30,000 to $40,000 directly into an RRSP in the year he receives the money from the estate, or is there a “law of diminishing returns”, as far as income tax refunds go? Would he be better off spreading this out over two or three years? I’m sure there are a lot of baby boomers out there who will soon be facing similar dilemmas.

Gordon Pape answer: Very good question and you’re right – it’s one that will affect many people in the coming years. I suggest that your husband make a maximum RRSP contribution immediately, using the full carry-over. This gets the money working in a tax-sheltered environment right away.

However, he should not claim the total deduction immediately, since s income is relatively modest. He can spread the claim over as many years as he wants. The best strategy is to claim just enough each year to reduce his taxable income to the lowest bracket, and carry the balance forward. There is no time limit on this.

One other point. You don’t say whether you have an RRSP, pension, or even if you’re working. Depending on your family situation, it may be worthwhile directing some of this money to a spousal RRSP.