RRSP Myth #2
If the first RRSP myth (see last Tuesday’s blog) is all about not knowing the difference between RRSPs and the investments that need to come with, the second of the big myths in RRSP Land is the idea that you have to claim your RRSP deduction right away.
Ask a Spurt whether a young’un should be taking advantage of an RRSP and you’re likely get the answer, “No.” Why? Cos Spurts site the fact that young’uns won’t get a real tax break because they’re not making enough money to make that deduction pay off. So Myth #2 gets in the way of young people who aren’t yet making a ton of money starting down the road to savings. Since they believe they have to claim the deduction immediately, and they’re in a low tax bracket, they don’t see the point in using an RRSP.
While many people do take the deduction for their RRSP contribution from the get-go, there’s no rule that says you must. In fact, holding off makes sense when you’ll end up getting more money back from the Tax Man by delaying your deduction gratification. So if you’re just starting out and earning not-so-much, don’t bother claiming the deduction… save ‘em up until you’re in a higher tax bracket when you’ll get a bigger bang for your buck.
For goodness sake, don’t skip using an RRSP because you think you have to eat the whole cookie at once. It’s much easier to save a little every year – take nibbles of your cookie – and then claim the deduction when it’ll do the most good. Instead of saving up your contribution room, save up your deductions. You’ll be saving and you’ll be planning for a tax windfall down the road.
Life changes are another reason to pause and think… Think…THINK…Take the case of a woman who goes off on maternity leave in the middle of the year. Since her income is dramatically reduced for that year, her marginal tax rate will also be lower. Claiming the deduction for her RRSP would mean frittering away a perfectly good deduction on a low-income year. Better to hold the deduction for a year when her taxable income is back up. Then, even though her RRSP contribution limit would be less (based on the previous year’s earned income, which may have been smaller because she was on mat leave), giving her little room to maneuver when trying to minimize her taxes, her undeducted contribution from the previous year will come in very handy.
Whether you’re having a baby, just starting off in your career, taking a year off to get an MBA or planning a sabbatical, knowing you can delay claiming your deduction without losing it means you can plan to make those RRSP contributions work even harder in terms of the deduction you’ll eventually receive. They also eliminate the excuse, “What’s the point, I don’t pay that much tax now anyway.”
On Thursday: Myths #3 & #4