RRSP Q&A: Will I save money if I withdraw on maternity leave?

Answers to your RRSP questions.

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From February 16 to 19, 2010, MoneySense.ca’s top financial planners are answering your RRSP questions. For the full list of questions answered — or to submit a question of your own — click here.

I am currently making $75,000 per annum. I will be leaving on maternity leave (I work in Ontario) in May. I have a lot of room left in my RRSP contributions, and currently have about $9,000 in RRSPs. I have approx. $30,000 in cash sitting in an high interest bank account.

My plan was to take the $30k and put it in RRSPs this tax year, netting a substantial tax savings, and withdraw it next year while I’m on maternity leave at a lower income. I will be earning $75,000 from Jan-May and collecting the max. EI from May-Dec. Will this result in a tax savings? — Thanks

Barbara Garbens: If you are leaving on Maternity Leave in May (say May 1), your salaried earnings for the year will be $25,000 (4/12 of $75K) and your EI income will be $15,995 ($457 x 35 pay periods) for total earnings of $40,995.  Total tax on this level of income is about $6,000 (I didn’t assume any other credits other than the personal amount).  With an RRSP contribution of $30,000, you will get this back but you will not need to use all of the contribution as a deduction in order to bring your tax to $0.  You will need to play with the contribution amount, something your tax preparer could do.

In 2011 if you are back to work in May, your salaried earnings will be $50,000 (8/12 x $75,000) and EI will be $7769 ($457 x 17) for total income of $57,769.  An additional $30,000 of RRSP income will give you total income of $87,769 and taxes payable on this are $21,000.  Without the RRSP withdrawal, taxes payable are $11,184.  The difference is about $10,000.  Therefore, it does not make sense to withdraw the RRSP money in 2011 since you will save only $6K in taxes but pay $10K on its withdrawal.  You could of course leave the money in the RRSP for future growth.

Next question: Should we withdraw to pay down our mortgage?

Back to main RRSP Q&A page.

Want to offer your own advice? Let us know in the comments.

96 comments on “RRSP Q&A: Will I save money if I withdraw on maternity leave?

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  81. My wife and have started a similar strategy, except for her, she just finished maternity leave, and is not returning to work. That said, there is much less benefit for you as you still have a considerable amount of income while on mat leave. That said, here's some rough numbers I've worked out for you:

    Scenerio 1No RRSP
    2011 Income$75,000.00
    2011 Tax$19,060.98
    Net Income$55,939.02

    2012 Income$41,250.00
    2012 Tax$8,413.14
    Net Income$32,836.86

    TOTAL NET INCOME FOR 2 YEARS$88,775.88

    Scenerio 2With RRSP
    2011 Income$75,000.00
    Less RRSP Contribution$16,875.00
    2011 Taxable Income$58,125.00
    2011 Tax$13,649.12
    2011 Net Income$44,475.88

    2012 Income$41,250.00
    Plus RRSP withdrawal$16,875.00
    2012 Taxable Income$58,125.00
    2012 Tax Due$13,649.12
    2012 Net Income$44,475.88

    TOTAL NET INCOME FOR 2 YEARS$88,951.76

    Net Difference$175.88

    So to summarize, yes it would be beneficial, in theory, however considering you will get hit with a 20-30% withholding tax when you withdraw the RRSP, you would not see the actual benefit until you file your taxes in 2013. Considering how long a time frame that is, there are a lot easier ways to make $175.

    Hope that helps.

    Reply

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