When to start RRSP and maximize the limit?

[metta2006]

Hi,
We don't have a RRSP account yet as we had a low income until last year.
My hubby's gross income in 2007 was about 40K and this year he will be making 75K. I don't have a income because I am raising my baby.
We are thinking of a spousal RRSP.

My hubby's accumulated limit for this year is about 9000 dollars. We have money for this but wonder if it would be better to wait until he makes more money. He's a lawyer and his salary will increase every year quite a bit.
Should he start RRSP this year? If so, how much should he put in? At what point should he maximize the contribution limit?
Thanks so much.

[Justin C]

Put some in this year just to start growing the investment but don't claim it until he is close to his max income or in the last tax bracket (> ~123k)

[Bullseye]

If your family income for 2007 was $40k, and you have $9k available to contribute, I would consider doing so, all of it, and claiming it for 2007.

Do you only have the one child? How many will affect how worth this is doing. Try inputting your numbers into a tax program, then add in a $9k RRSP contribution and see the results. Not only will you get additional Ontario Tax Credits (because of the child), but also reduced Ontario health premium and increased property tax/rent credit. Then you will get a GST credit, and a greatly increased Child Tax Benefit, up to 23%!

Once you get your family income below $36k, you can get a whopping 70% back in tax refund and other goodies for every dollar of RRSP contribution you make, , based on two kids, right down to $31k (using your full $9k). It'll be a little less with only one child. Even if your spouse hits the top tax bracket, you will never achieve this kind of impact with RRSP's in future. Make yourself super low income for 2007, and watch how the government throws money at you. This is the result of years of social engineering, might as well use it to your advantage while you can.

Input your 2007 info into a tax program as I stated above, and then use the CRA calculators for CTB and GST to see the impacts of what this does. My numbers above will be proven by doing so.

[elty]

Don't forget your CTB has a marginal tax rate of ~12% if your income stays below ~37000. I am not familiar with BC tax so I don't know how much extra you get from the province, however:

By lowering your income to 37k, CESG will give you $200 (instead of just $100) for the first $500 RESP contribution. Not only that, you also gain CLB, which is another $500.

Notice that most of the benefit only applies to people < $37k income.

I don't know how many children you have, but at least bring it down to $37000. if you have more than 1 child, by all mean contribute as much as you can.

[metta2006]

Is 37K net or gross income? So if our income was 40K and we contributed 4K to RRSP, would our income become less than 37K? I have one child. It sounds like I should maximize my limit this year. Thanks for your tips.

[Bullseye]

I missed that the OP was from BC, I guess I read GTA instead of GVA. Not sure how BC tax works.

Again, plug your info in to a tax program, and play with CRA calculators. I'll bet that contributing to an RRSP for 2007 still works out better than doing so in future years with much higher income.

[TopTaxGuy]

I suggest contributing as much as you can afford and up to your deduction limit for the year. This will reduce your husbands marginal taxes.

If you require the funds for whatever reason in the future, you can easily withdraw the funds.

See How much can I contribute to my RRSP? (http://www.taxresource.ca/personaltax/rrsp_contributions.html)

and

Registered Retirement Savings Plans (http://www.taxresource.ca/personaltax/perstaxmain.html)

[Blunt]

I've done the calculations before and it's always better to buy some RRSP each year rather than building it into one big year.

[Thalo]

My suggestion is contribute the $9000 this year, don't deduct any of it for 2007 taxes, deduct it for 2008. Essentially it's the same as doing a last minute RRSP contribution next year, except the money grows in your RRSP, tax deferred, for an extra year.

Then again, you might need the extra money more now than you will next year. If that's the case, then by all means deduct it on 2007 taxes.

[Bullseye]

My suggestion is contribute the $9000 this year, don't deduct any of it for 2007 taxes, deduct it for 2008. Essentially it's the same as doing a last minute RRSP contribution next year, except the money grows in your RRSP, tax deferred, for an extra year.

Then again, you might need the extra money more now than you will next year. If that's the case, then by all means deduct it on 2007 taxes.

They would actually very likely be worse off by using the contribution next year instead of for 2007, for the reasons I stated above. Low income families with children have very high marginal tax rates, and this turns on its head the conventional logic that RRSP's are better at higher incomes. The key point is children.

[halflife150]

Wow, Bullseye is right. I never knew how much money the government is throwing at families with children, ridiculous! Higher incentive to have more babies then you can afford or having it earlier then you should. Kick in the pants to childless people.

The refundable sales tax impact would probably be minimal but your child benefits would definitely be worthwhile to lower you 2007 income by as much as possible to max those benefits. Do what Bullseye said for max benefits.

[Thalo]

They would actually very likely be worse off by using the contribution next year instead of for 2007, for the reasons I stated above. Low income families with children have very high marginal tax rates, and this turns on its head the conventional logic that RRSP's are better at higher incomes. The key point is children.


Do you mean there are more benefits to having a lower income for families with children? Okay, that makes sense. Plus you get the money now.

[Bullseye]

Do you mean there are more benefits to having a lower income for families with children?

Yes, for a family with two children under $40K per year income, every dollar of RRSP contribution gives you 23% more Child Tax Benefit, and 5% more GST refund. In Ontario, it will also give you almost 10% extra in Ontario tax reduction, and 2% extra for rent/property tax credit. This is all straight money in your pocket, tax free, not tax deferred.

At higher family income, all of that disappears, except CTB, which drops to 4% after $40K-ish, up until close to $100k family income.

[dutchca]

I know this is mostly about RRSP, but you should also consider maxing out and RESP for the child. CESG is worth quite a nice chunk of change.

[metta2006]

Don't forget your CTB has a marginal tax rate of ~12% if your income stays below ~37000. I am not familiar with BC tax so I don't know how much extra you get from the province, however:

By lowering your income to 37k, CESG will give you $200 (instead of just $100) for the first $500 RESP contribution. Not only that, you also gain CLB, which is another $500.

Notice that most of the benefit only applies to people < $37k income.

I don't know how many children you have, but at least bring it down to $37000. if you have more than 1 child, by all mean contribute as much as you can.

I don't understand this. I'm sorry for being ignorant. How will my RRSP contribution lower my income that much? If I contribute 7K this year, will my annual taxable income 40K become 33K? Or is it more like my income minus the interest I will earn from 7K will be my reduced income? Honestly, I don't think I understand how this works. Somebody help me understand pls?

Also, what tax program should I use? I used to use a free one as I was low income, but not any more. Thanks!

[Bullseye]

If I contribute 7K this year, will my annual taxable income 40K become 33K?

This is correct. RRSP contributions lower your taxable income, which is the same as saying that you get to make your RRSP investments in pre-tax dollars, which is where the large benefit lies.

When you withdraw them in retirement, you will pay taxes on every dollar you take out, but it should still leave you well ahead, because retired people tend to be in lower tax brackets.