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The Money Management Newsletter: RSP Planning
RRSPs and all the noise

Too many of us become confused by all of the "noise" of the RRSP season as institutions flog their products and past performance numbers in vast quantities in every form of media. Products however, should not be the number one consideration just before the deadline.

To help save our sanity we are usually better off at this late date to focus instead on attaining the best RRSP deduction possible and leaving the product choice to a time when we or our financial advisors can concentrate better.

What I mean by attaining the best RRSP deduction is, making the maximum use of the RRSP contribution rules to save the most on current and future tax. Contributions can be made to a money market account or savings account until more time can be given to product choices.

The first rule of thumb for married couples is to consider the retirement income picture of each spouse. If there will be any inequalities between the two, they should utilize the spousal RRSP option to work towards equalizing both retirement incomes and thus minimizing post retirement income tax as a couple.

For those with large RRSP contribution room who are considering borrowing to maximize contributions, think twice before applying the full eligible amount to one tax year.

A large deduction in one year may reduce your taxable income to a point where you are saving tax at a lower marginal rate than if you were to apply the deduction over two or more years to reduce your tax at your highest marginal rate. Income tax is a graduated system where the rate of taxation increases as taxable income rises. And conversely, the rate at which tax is saved declines as RRSP deductions reduce taxable income through each level. A large RRSP deduction could reduce the rate at which federal tax is saved from the highest level down to the lowest level. When surtaxes and provincial rates are factored in there can be a substantial reduction in potential savings.

It would be better to work through your tax return first to determine the optimum amount to apply to the current tax year, borrow what is required and save the rest of your contribution room and loan costs for later tax years.

If you are not borrowing, you could make the large RRSP contribution and just deduct enough to save taxes at your highest marginal rate, saving the rest of the deduction to the next tax year. This way you are maximize your RRSP tax savings.

If you had a spouse who passed away during the year, work through their final return to see if they had any RRSP contribution room along with tax payable. If so, make a spousal contribution in your name, if age permits, with your deceased spouse as the contributor thus reducing the tax payable on their final return.

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