RRSP Contributions: When’s the Best Time to Use Your Deduction?

RRSP contributions reduce your income tax, but you can choose when to use that deduction.

Few people know that you can contribute to your RRSP this year then sit on the deduction. Use that in a year of high income. Plus, by contributing now, you benefit from the tax sheltered gain.

Here’s an example. I had a call from a fellow who will retire in 3 years. He will take the commuted value of his pension. That pension currently has a commuted value of about $750,000. His current income is $75,000. His marginal tax rate [the highest tax charge that he pays on his last dollar earned] is nearly 30%. So, if he uses his RRSP deduction this year, he saves 30% at best on that income.

What if he contributes now to benefit from the tax sheltering but does NOT use the deduction write off? He sits on the deduction.

In 3 years, when he takes his commuted value, the cash portion will likely bump him up to a 53% marginal tax bracket. Therefore, he will save over 20% more on those taxable dollars: more bang for his buck. He gets the tax sheltering in either case.

Conclusion: if the commuted value is on the horizon for you, let’s do some tax planning now. Manage your tax bracket. The best time to use your RRSP deduction is when you are in your highest tax bracket.

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