Should I be claiming the RRSP contribution this year or wait next year?

[alanbrenton]

Hi,

What are the advantages of deferrring RRSP deduction on the income tax return? I recently got bumped over the lowest tax bracket and will be making a little more money in 2006.

Factoring in the cost of money, like student loans at 7.5%, does it make sense to defer the claim or use it this year? How much is the difference between tax rates for the lowest tax bracket and the next one (federal and provincial combined)?

Thanks for the advice.

[rfdrfd]

Use Excel and calculate the difference at the end. When you claim this year or not this year. See which one is better for you for 2005 tax return.

[alanbrenton]

Use Excel and calculate the difference at the end. When you claim this year or not this year. See which one is better for you for 2005 tax return.

I will try that suggestion. Surely it will be bigger in 2006 as my 2005 income was in the lowest tax bracket. I was just wondering whether the difference would more than make up for that amount when I have student loans at 7.5%.

[BadDrafter]

When I checked the national student loan web page the interest was bumped up to 8%.

[j27lee]

just go to quicktax web and run your numbers there... you can do it for free if you made less that 25k i think... the difference between the lowest and second lowest tax rate (federal) is 7%. Your provincial tax rates depend on where you live. For full tax rates: http://www.cra-arc.gc.ca/tax/individuals/faq/taxrates-e.html

james

[eelfliw]

The answer to this question lies in what your income will be for 2006, and the opportunity cost of not claiming it for 2005 tax year.

If you no clue how much money you'll be making in 2006, then just claim it in 2005.

[Rembrandt100]

Why would you want to lend your money (at no rate of return) to the gov. for another year?

dave

[eelfliw]

Why would you want to lend your money (at no rate of return) to the gov. for another year?

dave
Because the marginal tax rate jumps quite a bit going from tax bracket to tax bracket. So, if the OP is expecting to earn a lot more money in 2006 than 2005, declaraing RRSP contributions for the 2006 tax year instead of 2005 may help bring him down a brack and avoid partial income being taxed in a higher bracket.

This requires careful calculation to make it work. But with savings account interest rates @ only 3%, it may be worthwhile to let the gov't keep the money for 1 more year and save 5% on next year's marginal tax.