Lots of RRSP contribution room but no income, should I contribute from savings?
Hello everyone - a question for the collective wisdom of the forum. Thanks for your help!
My wife will be staying home this year with our now 1-year old son, and she will have virtually no income. She has approx. $17k in unused RRSP contribution room, and with no income this year, if she contributes from savings, she won't have any tax benefit this year to take advantage of. However, savings grow tax free in RRSPs, and are only taxed at redemption. SO - Is it better to forego the tax benefit now and contribute anyway, knowing that the funds will grow for the next 25-35 years without tax? Or, do we keep the savings outside of the RRSP and just pay the tax when we redeem (hopefully in the same timeframe)?
Chris from Calgary
It sounds like you don't need the money short term. Assuming your wife will one day earn income, make the RRSP contribution, but don't make the tax claim until she has taxable income. You'll still get the tax free growth and will get the tax deduction in the future when it benefits you. Just make sure you don't contribute above her limit.
You should also make sure here TFSA if fully funded.
Yes, start with the TFSA. $5000 for 2009 and $5000 for 2010.
I don't understand why you want to take the money out of savings though. You have your entire life to use that RRSP contribution room. If you are the only breadwinner, you will need every penny of those savings if adversity strikes. NO one knows what tomorrow holds, you could lose your job (touch wood) and will suddenly need that cash/savings to continue to eat and keep the lights on.
So IMO keep the money in savings for the next 1-2 years until she gets back to work and there is a good pool money in the bank. Investment returns are crap right now, unless you're really good at it (which most people are not), so you're not going to lose much growth by waiting a couple of years, the money safely in YOUR pocket.
You can withdraw funds from an RRSP and have 'em in your hands in a week or so. RRSPs don't really pose a liquidity problem.
Except you lose the contribution room. Not a problem if you don't expect to max out your contributions, anyway.
Originally Posted by MoneyGal
I believe you can also use secured borrowing on RRSP balances.
To clarify gwcanuck's response, you still report the contributions on Schedule 7, but you are not obligated to claim a tax deduction right away. It can be carried forward for use in future years.
Otherwise I agree with gwacancuck - it sounds like you have the cashflow to spare, so make the contribution.
Max the TFSA first, hands down. It is not taxed on redemption
Another 2 cents!
Like many financial dilemmas, the "solution" depends on your specific circumstances and risk tolerance. Is your income substantially higher than your spouse's? If so, you might consider a spousal RRSP. You can deduct the contribution from your income, which is higher than your wife's. The money will grow tax-deferred. The deduction will be applied against a higher marginal tax rate, yours. Your wife will still retain her contribution room for future, higher-earning years.
If you think that you may need the funds soon, then contributing to a TFSA may be better. When you withdraw funds from a RRSP, you lose the contribution room. The same is not true for a TFSA; the amount withdrawn can be re-contributed to your TFSA next year.