Question about RRSP tax credits.

[KrisYYC]

Hey all,

I have a question about using RRSP's to lessen the burden of income tax.

Can you throw money into RRSP's before the deadline, do your taxes, then withdraw the money out of the RRSP after filing taxes?

I realize RRSP will be taxed when withdrawn, but I believe it's only 10% if under $5000 but the tax "credit" is closer to 30%?

I've never really used RRSP's, I usually just put money into my TFSA.

My income has increased in the last couple years and I've been stung by the tax man a bit. Anything to lessen the pain will help.

Thanks in advance for any help!

[holden]

That 10% is only the withholding tax. The amount withdrawn counts as income so you will have to pay tax on it next year. Unless you plan on being on a much lower tax bracket it won't save you money overall, perhaps delay it a bit.

[KrisYYC]

Originally posted by holden
That 10% is only the withholding tax. The amount withdrawn counts as income so you will have to pay tax on it next year. Unless you plan on being on a much lower tax bracket it won't save you money overall, perhaps delay it a bit.

Wouldn't only the interest gained be counted as income considering I put my own money into the RRSP in the first place?

[roopi]

Originally posted by KrisYYC


Wouldn't only the interest gained be counted as income considering I put my own money into the RRSP in the first place?

You put money into RSP therefore you are not paying tax on that money because you will be receiving a tax credit.

If you withdraw from an RSP you are then required to pay the tax on that money since you already received a credit for it.

An RSP basically defers when you pay tax on money earned. The benefit of it is to withdraw the money when you have a lower income so you aren't paying as much in tax.

[KrisYYC]

Originally posted by roopi


You put money into RSP therefore you are not paying tax on that money because you will be receiving a tax credit.

If you withdraw from an RSP you are then required to pay the tax on that money since you already received a credit for it.

An RSP basically defers when you pay tax on money earned. The benefit of it is to withdraw the money when you have a lower income so you aren't paying as much in tax.

Ah I see. Thanks!

[Amysicle]

.

[ExtraSlow]

Some people do exactly that, and it can make some good sense, but keep in mind, the refund doesn't 100% pay back the LOC. At least, the refund from the extra contribution doesn't. Since the top marginal tax rate is 48%, that's the max percentage you'd get back from that contribution.

RESP contributions are where it's at. Deposit five grand, get an extra one grand contribution as a grant. Waaaaaaay better return.

[roopi]

Originally posted by Amysicle
Depending on the amount refunded vs. what you put in, would it make sense to borrow money from an LOC to put into your RRSP and use the refund to pay back the LOC?

Banks offer RSP loans at pretty good rates. The big benefit of doing this is you receive the tax break now, have money in your RSP to hopefully grow, and you can pay it back over a set term of usually 1-2 years. Also I guess you could deduct the interest on the loan as well.

Originally posted by ExtraSlow

RESP contributions are where it's at. Deposit five grand, get an extra one grand contribution as a grant. Waaaaaaay better return.

Definitely a good return but it requires having kids.

[ExtraSlow]

Originally posted by roopi
Definitely a good return but it requires having kids.

Which is a poor return . .

[variance]

Originally posted by ExtraSlow

RESP contributions are where it's at. Deposit five grand, get an extra one grand contribution as a grant. Waaaaaaay better return.

You only get the $1k if you missed a years of grants and are catching up. Otherwise the max is $500 grant if you contribute $2500 each year.

[KrisYYC]

Originally posted by ExtraSlow

Which is a poor return . .

Damn child labour laws!