# Quick..RRSP contribution advice



## saanweyn2k2 (Feb 23, 2011)

Here is my situation. I have not being contributing to my RRSP (0 before this year, I know stupid). I need advice before the RRSP contribution ends in 5 days.

Last year I made in total income $71,000 (total income, past 4 years I have averaged around $50,000). This includes about $7,000 in bonus, $4000 gains from ESSP (I haven't sold stocks), and $2,000 company contributed towards my RRSP. 

I paid about $9,500 in federal taxes. I made personal contribution to my RRSP of $3,000 (+$2,000 from my company). I'm single, not homeowner, and live in Ontario (no other possible deductions I can think of).

I have $40,000+ saved (earning probably less 1%). Now my question is how much should I contribute before Feb 28 to get the maximum returns on my tax return? Put in another way at what point will there be no tax benefit to contributing to my RRSP? I'm thinking of putting $15-20K towards a RRSP account.

Also is it possible to transfer and setup RRSP account all before Feb 28th?


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## Rico (Jan 27, 2011)

I'm sure an account can be set up quickly - it's RRSP season and they're all over this kind of thing.

So you have any debt? (car loan, etc). Consider paying that down.

As for the RRSPs - you say your total income is 71K - I'm not sure those gains you mentioned are taxable (yet) and the contribution likely goes against your Pension Adjustment (which reduces RRSP contribution room). I'm speculating here but the point is your income is around 65000-71000.

This year (and your average years) you appear to be taxed at a 31.15% combined marginal rate, starting around the 40K area (give or take - see below).

2010 rates
FED: 22% on the portion of taxable income between $40,970 and $81,941
PROV (ON):9.15% on $37,108 - $74214

So, a 20K RRSP deduction will keep you in this range (going below it will reduce the refund, which is what I think you were wondering) and you'd get back 6230 (to reinvest of course  )


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## MikeT (Feb 16, 2010)

I just recently did this for myself so I'll share my method.

I have all my t4's etc already. I filled out my t1 with current contributions only. Then figured out the exact dollar amount to contribute to knock me just out of the bracket. Logged into my bank, made the contribution, and finished my return.


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## Oldroe (Sep 18, 2009)

You also need to consider what to invest in. I suggest 30 day or 60 day gic, giving you enough time to make a good decision.


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## the-royal-mail (Dec 11, 2009)

You are rushing too much. People typically do not make good decisions when they are rushing like this. 

I recommend you take some time, read up on investing, emergency savings and tax. You can always use up RRSP contribution room in later years if you determine that is really the right thing for you.


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## CanadianCapitalist (Mar 31, 2009)

Check out this tax calculator to figure out how much tax you can defer by contributing to a RRSP.

http://www.walterharder.ca/T1.asp

I second TRM's suggestion. Don't rush things at the last minute and feel you have to buy some mutual funds. You can park your contribution in cash until you arrive at a decision on what to do.

It's not too late to open a RRSP account and make a contribution. If you do this at an institution that doesn't have transfer fees, you can later transfer your RRSP over to another institution without penalty.


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## carverman (Nov 8, 2010)

CanadianCapitalist said:


> [I second TRM's suggestion. Don't rush things at the last minute and feel you have to buy some mutual funds. You can park your contribution in cash until you arrive at a decision on what to do.
> 
> It's not too late to open a RRSP account and make a contribution. If you do this at an institution that doesn't have transfer fees, you can later transfer your RRSP over to another institution without penalty.



Not only should you not rush into contributing to an RRSP because of the
March 1st deadline, but you really need to examine your personal finances
and how much you can afford to contribute vs what you will get back in
a tax rebate.

Most rebates will depend on what tax bracket you are in. The other thing
that one has to consider is Ontario's surcharge tax on income above a
certain amount...ie: you make more..you pay more in Ont tax and OHIP.

But unlike the tax credits, which go through some number crunching and
are not dollar for dollar when it comes down to taxable income, at least
AFAIK, the RRSP deduction comes right off the top to reduce your taxable
income.

What you get back in a refund, will depend again on your personal deductions
and tax situation, it probably won't be dollar for dollar for your RRSP
contribution.

According to the CRA tax guide (included with the tax forms mailed to the individual, 
you can contribute up to your maximum allowed by CRA, but you *don't have to claim the full amount *of
RRSP contribution, and you are allowed to carry forward the difference 
for later years when your income may be higher..(or lower). 

There is a Fed tax form (Sched 7) to report this when filing...but then
you will need to have a personal file to track the unused amount, because
the Feds certainly won't do it for you.


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## carverman (Nov 8, 2010)

saanweyn2k2 said:


> I have $40,000+ saved (earning probably less 1%). *Now my question is how much should I contribute before Feb 28 to get the maximum returns on my tax return?* Put in another way at what point will there be no tax benefit to contributing to my RRSP? I'm thinking of putting $15-20K towards a RRSP account.
> 
> Also is it possible to transfer and setup RRSP account all before Feb 28th?


Well you need to do the math yourself with a calculator. 

If you have the CRA tax forms, just fill in your income in pencil on a photocopied tax form , fit in a " contribution number" that you think could be your RRSP contribution (up to the maximum allowed to you by CRA) , number crunch the tax credits and subtract what taxes you have already paid to arrive at either a refund..or an amount you still owe them.

Do a few of these in increments and you will arrive at the "number "you can
afford to contribute and still realize the best tax deduction available to you.


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## OhGreatGuru (May 24, 2009)

As others have suggested, assuming you are in a 31% marginal tax bracket, you will get 31% of your contribution(s) back in a tax refund, until you reach the point where you move to a lower bracket. You probably shouldn't contribute more than that. How much less depends on your other financial need and objectives.

If you have no debt, I would encourage you to make a substantial contribution, particularly as your income was higher than average last year. You have not mentioned if any of your $40K savings are in a TFSA. If not, you should open one. Be aware that TFSA's can hold almost anyting an RRSP can - they don't just have to be "high interest savings accounts". Bank advertising can be misleading in this regard. But I would imagine you want preservation of capital and liquidity in your savings at this stage in your life, to save for things like a car, downpayment on a house, etc.


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## saanweyn2k2 (Feb 23, 2011)

Thanks everyone for the response! I'm in the process of setting up 3/6/12 month GIC and waiting off decision for long term investment until I do more research into the best long term investment vehicle.

I do have question about how contributing too much could reduce my tax refund. Why is the case? I would imagine the worst case scenario is that there is point where more contribution doesn't increase my tax refund, rather than reducing it.

I found my yearly contribution limit is $30,420. I plan on contributing $25,000.


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## Eclectic12 (Oct 20, 2010)

Rico said:


> I'm sure an account can be set up quickly - it's RRSP season and they're all over this kind of thing.
> 
> So you have any debt? (car loan, etc). Consider paying that down.
> 
> ...


+1 that a personal RRSP account can be setup quickly and paying down any outstanding debt. My RRSP was setup in a hour or so, including deciding how much to put in it.

It is probably a good idea for saanweyn2k2 to evaluate how much will be in it, what type of investments and the corresponding costs. This type of review/decision will take some learning and time though.

A workaround alluded to in other posts, a straight RRSP savings/GIC account can be setup for little or no fees. Then when the learning has been completed, an RRSP savings/GIC account to the final type of RRSP account can be made. The main drawbacks to this approach is that the transfer will require a form to request, it may take longer than the advertised thirty days (mine was within the same banking group yet took about fifty days) and the returns won't be great. The advantage is that the money will be tax sheltered plus growing (albeit slowly) while the learning happens with few fees. 

As for the "not taxable", I'm assuming you are referring to the gains ESSP which does not have any sales yet. More details are required - as an example, if part of this is stock options, the employer is supposed to withhold CPP and income tax, barring an employee election to defer the taxable benefit until the shares are sold - leaving the CPP.
http://www.taxpage.com/tax-tips/Employee-Stock-Options.htm
http://www.bdo.ca/library/publicati...mployee-stock-benefits-and-capital-losses.cfm

As for the contribution, I agree that it likely involves a PA which will adjust the 2010 earned RRSP contribution room. My understanding is that what will cause the PA is where the employer has made the contribution amount tax free (except CPP and EI). In this case, the refund has already been received as almost 100% is going into the RRSP. This requires a different method as a "regular" RRSP contribution is made with taxed dollars - which will generate a refund.


Cheers

I


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## saanweyn2k2 (Feb 23, 2011)

Eclectic12 said:


> As for the "not taxable", I'm assuming you are referring to the gains ESSP which does not have any sales yet. More details are required - as an example, if part of this is stock options, the employer is supposed to withhold CPP and income tax, barring an employee election to defer the taxable benefit until the shares are sold - leaving the CPP.
> http://www.taxpage.com/tax-tips/Employee-Stock-Options.htm
> http://www.bdo.ca/library/publicati...mployee-stock-benefits-and-capital-losses.cfm


Thanks for the info/advice!

This is was not stock option as far as am aware. Rather it was your typical 15% disconnect for stock purchases. It is the lower of the lock in price (date plan started, covers 2 years) or the date of the purchase. This is American company and I believe the shares are even stored in USA. I'm assuming this is considered ESSP plan. In my T4 my employer has included this amount in my total income.


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## OhGreatGuru (May 24, 2009)

saanweyn2k2 said:


> ...
> I do have question about how contributing too much could reduce my tax refund. Why is the case? I would imagine the worst case scenario is that there is point where more contribution doesn't increase my tax refund, rather than reducing it.
> 
> I found my yearly contribution limit is $30,420. I plan on contributing $25,000.


I can't find the quote that contributing too much would "reduce" your refund. But dollar-for-dollar, once your have dropped down a tax bracket, the percentage you will get back for the extra contribution will be lower, because it will be at the marginal rate of the lower tax bracket. 

In any case, if the contribution you make is more than you need to reach the lower tax bracket, you can choose, when filing your income taxes to only deduct enough to drop your taxable income to the next lower bracket. Any undeducted contributions can be carried forward to use in a later year. It's up to you.


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## carverman (Nov 8, 2010)

OhGreatGuru said:


> If you have no debt, I would encourage you to make a substantial contribution, particularly as your income was higher than average last year. You have not mentioned if any of your $40K savings are in a TFSA. If not, you should open one. *Be aware that TFSA's can hold almost anyting an RRSP can - they don't just have to be "high interest savings accounts"*. QUOTE]
> 
> Yes, but AFAIK, the main difference between an RRSP and a TFSA is
> that any money you put in a TFSA does not provide any tax relief.
> ...


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## carverman (Nov 8, 2010)

OhGreatGuru said:


> I can't find the quote that contributing too much would "reduce" your refund. But dollar-for-dollar, once your have dropped down a tax bracket, the percentage you will get back for the extra contribution will be lower, because it will be at the marginal rate of the lower tax bracket.
> 
> In any case, if the contribution you make is more than you need to reach the lower tax bracket, you can choose, when filing your income taxes to only deduct enough to drop your taxable income to the next lower bracket. Any undeducted contributions can be carried forward to use in a later year. It's up to you.


Yes, it can have diminishing returns. The other thing that the OP has
to consider is his maximum RRSP contribution room determined by
CRA . If he is a member of a company pension plan, that contribution
amount is reduced, so he has to look at his Tax assessment from the
last year and determine what his current contribution room is. They
won't just allow you to drop in say $25K or 50K (for instance, suppose you won a lottery and wanted to "top up your RRSP for that year) . If you
over contribute, again, they will inforce a penalty on the overcontribution.

Again..strings attached..they don't want you to get rich and pay no taxes,LOL!


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## Eclectic12 (Oct 20, 2010)

carverman said:


> OhGreatGuru said:
> 
> 
> > If you have no debt, I would encourage you to make a substantial contribution, particularly as your income was higher than average last year. You have not mentioned if any of your $40K savings are in a TFSA. If not, you should open one. *Be aware that TFSA's can hold almost anyting an RRSP can - they don't just have to be "high interest savings accounts"*. QUOTE]
> ...


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## Eclectic12 (Oct 20, 2010)

carverman said:


> Yes, it can have diminishing returns. The other thing that the OP has
> to consider is his maximum RRSP contribution room determined by
> CRA . If he is a member of a company pension plan, that contribution
> amount is reduced, so he has to look at his Tax assessment from the
> ...


+1 for the pension plan will affect the RRSP contribution room.

Then too, if it is a defined benefit plan, there is a multiplier. In previous DB plans I've been in, I contributed $600, the employer contributed $1200 but my RRSP room earned was reduced by $3K.

If it is a defined contribution plan, $600 + $1200 will reduce the RRSP room earned by $1800.


As for the Tax assessment to find out - CRA makes mistakes (a keying error obliterated $12K of my RRSP room) so I always use my T4 plus returns to run my own calculations and double check what CRA thinks.


Interestingly enough, the TFSA basic over-contribution penalty is the same as the RRSP (i.e. 1 % per month until the over amount is addressed). Though there is legislation in progress to allow stiffer penalties for those deliberately over-contributing to their TFSA.


Actually, the pension plan bit is about leveling the playing field as well as fairness. If you plus your employer contribute $1800 tax-free to a pension plan - without the adjustments, you'd be at an advantage compared to someone who only has an RRSP.


Cheers


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## Brian Weatherdon CFP (Jan 18, 2011)

Awesome, it gets you started. Think of all you'll know before this time next year. How much more confident you will be! Now you can enjoy the leisure of whatever time you want to take on investment decisions. You'll have the tax refund coming to you too; so ponder how you'll put that to work. 

So if you come to focus on a dividend yield that's 3% or higher (plus capital growth over time), that will look very healthy compared to the minimal % rates in GICs. So assuming you use the 3/6/12 month deposit rates, you'll have the tax refund + the 3 month deposit coming available for something that offers dividends and growth.

Best to you!
BW


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## carverman (Nov 8, 2010)

Eclectic12 said:


> Depending on which part is being focussed on, this is partially correct or completely wrong.
> *grin*
> 
> Both the RRSP and the TFSA provide tax relief - just different types. The RRSP is temporary tax relief as it defers the tax while the TFSA is permanent as it avoids all Canadian tax.


Yes, thank you for pointing that out. I was thinking more of immediate tax relief as in the tax refund from an RRSP contribution 
and didn't consider the long term tax relief of not having to pay tax on any interest or even growth in the TFSA. 




> As for it being "*just a savings plan* (bearing low interest currently)" - that is your choice. As mentioned, like a self-directed RRSP, you can setup a TFSA that will hold a range of investments such as stocks, bonds, mutual funds, GICs etc.


Thanks again for pointing that out. I do have a TFSA currently, but it is only used EFT for fund transfer between my bank accounts.
I didn't realize you can put other types of investment items in it. 

For instance; CSB are paper type investments and I can't see how you could apply them to a TFSA. 
At my age, I definitely need safe investments to put into the TFSA as I can't afford any reduction in investment income now
that my company pension fund is going to be wound up sometime this year thanks to Nortels bankruptcy and severe pension
underfunding. 



> For example, I have not used up all of my 2009 + 2010 + 2011 TFSA contribution room but because I bought cheap dividend paying stocks, particularly during Mar 2009, my current balance is over $18K, before adding in the unused contribution room. For one stock, if I sold today, I'd have a 100% capital gain and it has been paying me 9% in dividends since I bought - all tax free.


Thanks again for pointing that out and the magic words "tax free".



> IMHO, the best way to think of the TFSA is the "Tax Free Investment Account".
> What you choose decides whether "Savings" is in the mix.


It is interesting that the gov't didn't call it that..TFIA. I guess they want to mimimize the amount of tax free savings in the TFSA and encourage people to invest in an RRSP (where you can have as many as you want? ) as long as you stay within the their guidelines..and save for the future, where they can tax you again and again, even at a lower tax rate.




> Your post:
> is misleading as it appears to say that the maximum yearly contribution is $5K and then later you add the "unused room" and "last year's withdrawals".
> 
> Some lucky ones who have had their stocks triple and have withdrawn last year can easily have a 2011 TFSA contribution room of $20K.


I'm only going by whatever info I can find online about max contributions and
carry over of unused contributions OR amounts withdrawn from a TFSA.
I don't have any stock investments..lost mine due to Nortel bankruptcy, so
I am only concerned with actual dollar numbers and EFT from leftover
balances from month to month in my checking account which has my pensions
deposit only. 

Thanks again for your insights on TFSA. As they say, you learn something
new everyday...or should.


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## saanweyn2k2 (Feb 23, 2011)

Thanks everybody. I nearly contributed my max contribution room (left some for next year). I will be getting approx $7K . Without this contribution I would have being paying CRA $300. Nice to turn the tables on them lol.

I invested in GIC that is called wait/see. It earns only 0.5% but I can take out and invest in other vehicles at any time. I'm going to research the best investment options for next month or so. I'm thinking wait and see how things play out in the world before I dive in.


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