RRSPs: What you should know if your income is low

So it’s RRSP season again, and you’re trying to decide how much (if anything) to contribute this year.

This is especially a question if you didn’t end up earning much. Here are the top three things you need to know about RRSPs in a low-income year.

1. RRSPs are less helpful to people with low or moderate income in the year

RRSPs save you tax by decreasing the amount of your income that’s considered to be taxable. For instance, if you earn $65,000/year and you make a $5,000 contribution, you pay tax on only $60,000 ($65,000 – $5,000).

However, generally speaking the less you earn, the less power an RRSP contribution has to save you tax, because the tax savings are dependent on your marginal tax rate.

If this past year was a low-earning year (e.g., less than $40,000 for a single person), consider putting off RRSP contributions until you’re in a higher tax bracket. That way you can contribute the same amount but get a bigger tax break.

2. Consider spousal contributions if you and your spouse have widely different incomes

If you and your spouse are in very different tax brackets, the effect of RRSP contributions will be different for each of you. You can improve your tax outcome as a family by having the higher income earner make a Spousal RRSP Contribution. Be aware that you need to specify that you’re making a spousal contribution at the time you contribute.

3. You can carry forward existing RRSP contributions

If you fear your income was too low to use your contributions, you can carry them forward.

Even if you’re not going to use your contribution for the tax year, you need to report that you made it. On your tax return, report the contribution but specify that you’re only deducting part (or none) of it.

The unused part of your contribution will be carried forward and made available to you in future years. These so-called ‘undeducted RRSP contributions’ are tracked by CRA and indicated on your Notice of Assessment.

You can carry forward undeducted RRSP contributions indefinitely, until you have that great income year where you apply them all and drop that tax bill hard. Boo-ya!