Wants to use inheritance for RRSP contribution

Zoomer | January 1st, 2006

Question: I have a question about unused RRSP contributions. My tax return from last year shows that I can contribute almost $60,000. I have recently received an inheritance and wondered how much of a return I could expect if I made the entire $60,000 contribution? My current salary is $65,000. – G.S.

Answer:

You can make the entire $60,000 contribution if you wish, but you should spread out the deduction claims over a few years in order to maximize the tax benefit. This is perfectly legal.

For example, claim a large enough deduction for the current year to reduce your taxable income to the lowest bracket (or to zero, if you prefer) and save the rest. If your total income is $65,000, let’s say you have taxable income of $55,000 after various credits and deductions. If you live in Ontario, your marginal tax rate is about 31%. By claiming enough of your RRSP contribution to bring your taxable income down to $31,677, you’ll reduce your marginal rate all the way to 22%. You may decide that’s good enough and keep the remainder of the deduction room for future years. – G.P.