My wife is currently at home with our two kids, but she plans to return to work in a year or two. Would it make sense for her to withdraw money from her RRSP while she’s in a low tax bracket? She could put it into a TFSA, then reinvest that money back into her RRSP for a bigger refund when she returns to work and is in a higher tax bracket.
—Richard Hawkins, Toronto
It’s a complicated strategy and in rare circumstances it makes sense, says Ross McShane, director of financial planning at McLarty & Co in Ottawa, but there are some key things you need to consider first. “It’s important to look at the tax bill as a family unit,” he says. While a small withdrawal from the RRSP would not be taxable in her hands, it’s not tax-free for the entire family. The spousal tax credit (which McShane says can be worth up to $2,000, although it varies by province) might be affected if she took money out of her RRSP.
There are other considerations, too. Unlike TFSAs, you don’t get your contribution room back later when you make a withdrawal from an RRSP. Unless she has unused RRSP contribution room from before she took leave from work, she would have to earn the room back before she could contribute to her RRSP again, says McShane.
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