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Old 09-01-2010, 10:58 AM   #1
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Need RRSP help again

I was discussing with a co-worker (in cantonese) but I don't quite understand all these deep cantonese he uses and were getting no where.

Anyways, it was about using up my contribution limit.

Here is what we were discussing. He said that, past contribution have no effect on current year's income tax.

For example, I work in 2008 and my RRSP contribution limit is $2000 and did not contribute. I work in 2009, and my RRSP contribution limit is bumped by another $2000, so that's $4000, and didn't contribute.

Now 2010, my RRSP contribution limit will be $6000. Will contributing $2000 have any difference than contributing the maximum limit when it comes to getting my tax refund?

What I am trying to achieve here is, since I've never contributed to my RRSP ever, I want to maximize my tax refund this year and get back as much as possible. If the previous year's contribution limit has no effect on this year's refund, then I want to contribute just enough to maximize my refund.
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Old 09-01-2010, 11:54 AM   #2
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RRSP room accumulates if you don't use it, yet it is delayed a year as it is based off your previous year's income. Revisiting your example:

2007: never worked before, $0 RRSP room
2008: worked, $0 RRSP room
2009: worked, $0K RRSP room rolled over, $2K RRSP room earned in 2008, $2K RRSP room remaining
2010: worked, $2K RRSP room rolled over, $2K RRSP room earned in 2009, contributed $2K to RRSP, $2K RRSP room remaining
2011: worked, $2K RRSP room rolled over, $2K RRSP room earned in 2010

Any contribution will have an affect on your tax return. You are also permitted to over-contribute $2K, yet anything over contribution above $2K you pay a fee for.
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Old 09-01-2010, 11:25 PM   #3
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if you put in $6000 this year you will get a tax refund on the whole $6k. how much depends on which tax bracket you are in, and where you are in it. IE if you are only $3k into your current bracket. you will get tax refund off of 3k at current rate, and the other 3k is taken off the rate below yours.

in this case you would be better off putting 3k in this year and 3k in next year instead of 6k this year.
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Old 09-02-2010, 06:41 AM   #4
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Oh, so to maximize my refund, I should just contribute enough to bring me to a lower tax bracket?
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Old 09-02-2010, 07:48 AM   #5
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Quote:
Originally Posted by aznlangjai View Post
Oh, so to maximize my refund, I should just contribute enough to bring me to a lower tax bracket?
You should see an adviser, and buy me a beer.

The brackets in BC look like this:

first $35,859 20.06%
over $35,859 up to $40,970 22.70%
over $40,970 up to $71,719 29.70%
over $71,719 up to $81,941 32.50%
over $81,941 up to $82,342 36.50%
over $82,342 up to $99,987 38.29%
over $99,987 up to $127,021 40.70%
over $127,021 43.70%

- $6K is not going to move you a bracket unless you're right on the edge.
- Most brackets are close together, so even if you dropped down a bracket you'd be getting a very similar return as waiting a year. Plus you'll have the money earlier to make more over a year.
- IMHO the only brackets where dropping down would make less sense is $40,970 and $81,941. You get 6-7% less for every dollar you contribute that brings you under $40,970 and $81,941. (Yes I know the drop at $81,941 is 4%, yet I'm assuming the $81,941-$82,342 bracket is so small to discount it).
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Old 09-02-2010, 08:18 AM   #6
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The $6K was just an example, and now it's just getting a little bit more confusing.

I just want to know... if this year, I gain $5k contribution room, increasing my RRSP contribution limit to $14k, will contributing $14k have any differnce to contributing $5k in terms of getting my refund.

Or is there a maximum limit you can get on tax refunds?

Again, my co-worker and I discussed and he said that RRSP contribution limit carried over from the years prior to 2010 have no affect on tax refunds, so if say if I put in $5k this year, I will get back $3000. Even if I contribute more, $3000 is all I get? Or no?
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Old 09-02-2010, 08:54 AM   #7
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there is no limit on tax refunds...
but you have to apply the RRSP tax deduction in order to lower your net income...and thus receiving a larger refund...
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Old 09-02-2010, 09:05 AM   #8
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Quote:
Originally Posted by aznlangjai View Post
The $6K was just an example, and now it's just getting a little bit more confusing.

I just want to know... if this year, I gain $5k contribution room, increasing my RRSP contribution limit to $14k, will contributing $14k have any differnce to contributing $5k in terms of getting my refund.

Or is there a maximum limit you can get on tax refunds?

Again, my co-worker and I discussed and he said that RRSP contribution limit carried over from the years prior to 2010 have no affect on tax refunds, so if say if I put in $5k this year, I will get back $3000. Even if I contribute more, $3000 is all I get? Or no?
First, your question makes no sense, so you're misunderstanding something. Instead of playing with imaginary numbers you now change, put down some hard numbers and we'll show you how it works, ie:
- projected 2010 income
- current RRSP room (on your 2009 tax return, look it up!)
- how much you plan to contribute

Determining your contribution room for 2010 is VERY SIMPLE. It is written on your 2009 tax return which you should have filed away, or you can lookup online. Find it, write it down, this is the maximum you can contribute in 2010 - tell your coworker he's an idiot for making it more complicated that that.

From your numbers I am going to assume $9K is listed on your 2009 tax return, and $5K is 18% of your 2010 salary so you think you have $14K total. You're misunderstanding, it is very clear, this is why the CRA puts it right on your previous year's tax return.

To answer some of your questions:

Increasing tax return - If you contribute X dollars, you get Y% back based on the table I posted. The more you contribute, the less % you get back.

If $5K is 18% of your salary, I assume you make ~$50K. Thus you can contribute $9K without dropping a tax bracket, and you'll get 29.7% of every dollar you contribute back. If you contribute $5K you get $1.5K back. If you contribute $9K you get $2.6K back.

Tax return maximum - There is no maximum "limit". If you made $40K, have $40K RRSP contribution room, and $40K savings, you can contribute $40K to your RRSP and get every single tax dollar back. The only "limit" is usually your RRSP contribution room is less than your income. If your RRSP contribution room was more than your income, you cannot get back more tax than you paid (there is a trick around this, yet lets keep it simple).
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Old 09-02-2010, 05:38 PM   #9
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So.... contributing to the RRSP contribution room given in 2007, 2008 will affect/increase my tax refund for 2010?
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Old 09-03-2010, 12:14 AM   #10
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contribution room does not affect anything..

you have to contribute and use the deduction in order to get a larger refund..
you can also contribute and elect not to use the deduction...therefore deferring the tax advantage
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Old 09-03-2010, 09:02 AM   #11
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Quote:
Originally Posted by aznlangjai View Post
So.... contributing to the RRSP contribution room given in 2007, 2008 will affect/increase my tax refund for 2010?
Please see an adviser.

As waddy pointed out, it is as simple as "Contribution room" and "Contributions". You gain contribution room every year (if you report an income) and it adds up. You use that contribution room by making a contribution which reduces your effective income. Your taxes are then calculated on the reduced income, and you get a tax return cause you've overpaid.

The 2007, 2008, 2009, 2010, ... stuff is just confusing you. It is simple, your contribution room for 2010 is written on your 2009 tax return. It includes the sum of all years previous contribution room you have not used.
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Old 09-03-2010, 04:37 PM   #12
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Quote:
Originally Posted by aznlangjai View Post
The $6K was just an example, and now it's just getting a little bit more confusing.

I just want to know... if this year, I gain $5k contribution room, increasing my RRSP contribution limit to $14k, will contributing $14k have any differnce to contributing $5k in terms of getting my refund.

Or is there a maximum limit you can get on tax refunds?

Again, my co-worker and I discussed and he said that RRSP contribution limit carried over from the years prior to 2010 have no affect on tax refunds, so if say if I put in $5k this year, I will get back $3000. Even if I contribute more, $3000 is all I get? Or no?

if you put 14k in you'll get back more then if you put 5k in... if that is the answer you are looking for. yes. however depending on how much you make it might not be best to put all 14k in one year.

if you make $55k / yr you'll get back $1500 for $5k in or $4200 back for 14k in.

if you make say 48k/yr you'd be better off putting 7k in this year and 7k in next year. 14k this year = $3700 back. 7k each year = 2100 each year = 4200 total. $500 more then 14k this year...

unless you post how much you will make in 2010 we can't really help you.

Last edited by johny; 09-03-2010 at 04:47 PM.
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Old 09-04-2010, 11:05 PM   #13
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Quote:
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if you put 14k in you'll get back more then if you put 5k in... if that is the answer you are looking for. yes. however depending on how much you make it might not be best to put all 14k in one year.

if you make $55k / yr you'll get back $1500 for $5k in or $4200 back for 14k in.

if you make say 48k/yr you'd be better off putting 7k in this year and 7k in next year. 14k this year = $3700 back. 7k each year = 2100 each year = 4200 total. $500 more then 14k this year...

unless you post how much you will make in 2010 we can't really help you.
I won't know until I get my T4. My work hours are not consistently 8 hours a day and I work 6 days. So in a week I get about 40 - 50 hours.
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Old 09-05-2010, 10:13 AM   #14
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but you should still know approx. how much you'll be making...
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Old 09-06-2010, 06:37 AM   #15
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around 32k before tax.
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Old 09-06-2010, 12:30 PM   #16
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Quote:
Originally Posted by taylor192 View Post
The brackets in BC look like this:

first $35,859 20.06%
over $35,859 up to $40,970 22.70%
over $40,970 up to $71,719 29.70%
over $71,719 up to $81,941 32.50%
over $81,941 up to $82,342 36.50%
over $82,342 up to $99,987 38.29%
over $99,987 up to $127,021 40.70%
over $127,021 43.70%
I would invest in rrsp if I had excess cash...but I would save the rrsp deductions for when you're in a higher tax bracket..

There are other things to consider.. like account fees...
for example RBC charges a quarterly fee for accounts under $25k of market value
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Old 10-30-2010, 10:46 AM   #17
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If you are a salaried individual earning less than $35 per year you should not be contributing to RSP's. This places you in the lowest tax bracket therefore the refund you receive is only 20%. You are better off contributing into a TFSA account. At withdrawal RSP accounts are taxed negatively. Withdrawals are considered income and 100% taxable even though the products held within are considered capital gains (such as stocks and mutual funds) Withdrawals from a TFSA are tax exempt. Even though you did not receive a tax refund in the beginning you are still better off at retirement due to the tax exempt status.

The idea behind the RSP's is that you contribute in a higher tax bracket than you retire. For example if you make $100,000 and contribute $10,000 you receive a refund of approximately $4000. When you retire and withdraw less than $35,000 from your RSP you will be taxed at 20%. All those years leading up to retirement you enjoyed tax deferred growth and a large refund in the beginning. If you make $32 and make an RSP contribution of $1000 you will receive a refund of $200. Let's say you retire and take out $1000 you pay taxes of $200. There is no spread.

I hope this makes senses.

I am a licensed financial planner and this is a professional opinion.
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