# RRSP Question, contribution room, taxes paid, how much refund can she claim?



## imaginenewmedia (Apr 4, 2012)

My wife has $39,000 in contribution room for 2014, but she paid only $9000 in taxes. Due to the sale of our house she can make the full contribution, (Which will be this week) but also wants to maximize her refund. Is her refund limited to the amount of taxes she actually paid last year? Any other strategies we may consider? She does have a spousal rrsp to which I intend to max out my contribution. (Giving me the deduction).
Thanks
Andy


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## OptsyEagle (Nov 29, 2009)

How much tax savings she gets from an RRSP contribution will be dependant on her taxable income from 2014, which you have not stated.

When it comes to an RRSP contribution, her "refund" is limited to the income tax she has paid. In other words if she paid $9,000 of income tax they will not give her back more. An RRSP simply reduces the tax one needs to pay, it does not generate money from anywhere else.


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## Guban (Jul 5, 2011)

You can contribute to a spousal RRSP using your contribution room (not hers) and giving you a tax refund. After 3 years, it can be taken out, and taxed in your wife's name.

Your wife's contributions into her RRSP is based on her contribution room ($39k), and deducted on her 2014 or later tax returns. The money contributed gets removed from her taxable income when the deduction is claimed. As such, each dollar deduction claimed does not result in a dollar of tax savings. The tax savings depends on the marginal tax rate. So, does a $39k deduction result in $9k savings? It depends. Btw, I hope that the $9k tax is the tax calculated on the 2014 tax return, not what was deducted off her pay cheque.

You may wish to contribute enough money to get yourself and your wife to the lowest tax bracket, and save the rest for a future time so that you can take the deductions at a higher tax rate. You can use your TFSA to shelter any other investments. Remember, the money inside a RRSP is tax deferred, and you will pay taxes on your RRSP when you withdraw it out of the plan. It would be a shame to deduct it at the lowest tax bracket, and pay taxes at a much higher rate when you withdraw it.

You would need to specify much more detail to get a better, more personalized answer. Eg, how much income do you and your wife earn in 2014, and in future years, TFSA room, RRSP sizes, time frame for future withdraws, ...


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## imaginenewmedia (Apr 4, 2012)

Thanks OptsyEagle, her income was around $50k, no other investments or complications. Would it be better to stagger the amount contributions over a few years to minimize her tax burden?


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## Guban (Jul 5, 2011)

I was typing when OptsyEagle replied, and maybe the same happened when you replied, but in order to answer whether you should stagger contributions depends on your TFSA situations, balances in her RRSP as well as when the withdraws will happen, amongst other things.


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## OptsyEagle (Nov 29, 2009)

I should have probably asked what province you are in as well, but it will have less of an effect. To answer the question quickly, she would need to contribute the full $39,000 to get back the $9,000 of tax they withheld from her. 

As Guban alluded to, however, she is not getting back exactly 23 cents for every dollar she contributes, as the math above might suggest. She is getting back around 31 cents per dollar on the first $6,000 of RRSP contributions. Then she is getting around 24 cents per dollar on the next $3,750 of RRSP contributions. The average here is around 28% tax savings. After that she only gets around 20 cents on the dollar for the remainder. This is assuming she lives in Ontario, however, if in another province, my numbers will still be very close.

So all that being said, if her income is going to be approximately the same, I might contribute the full $39,000 to her RRSP, but I would probably deduct around $9,750 per year for the next 4 years. This strategy is based on the idea that the money that would only receive a 20% refund (all of the money deducted after the first $9,750) could generate almost 28% refund if she waited to deduct it in a following year. 28% divided by 20% is a 40% guaranteed after tax rate of return, on the tax money that she leaves with the federal government, in year one. It is about 20% return in year 2, since the 40% return takes two years to receive. It is a 13.3% return in year 3 and still a 10% return in year 4. 

Now, alternatively she could simply contribute $9,750 to her RRSP for this year and put the remainder into a TFSA, if she has the room, and then withdraw $9,750 per year, over the next 3 years to contribute to her RRSP in the following years.

Don't forget the $9,750 RRSP contribution is going to generate a refund cheque of around $2,700, each year. She is also going to generate more RRSP contribution room over the next 4 years, so roll those tax refunds back into the RRSP and your net worth is really going to start to rock and roll. That is how us financially [email protected] people do it, anyways. You could also spend it. I hear that is fun also.

Anyway, that is the math and that is how I would approach the issue


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