RRSP Myth #2: Annual RRSP deductions are mandatory

The second of the big myths in RRSP Land is the idea that you have to claim your RRSP deduction each year. Some experts cite the fact that young’uns won’t get a real tax break because they’re not making enough money to make that deduction sing.



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So this myth often gets in the way of young people who aren’t yet making a ton of money starting down the right road. Since they believe they have to claim the deduction, and they’re in a low tax bracket, they don’t see the point in using an RRSP and opt instead for a TFSA, the newer kid on the block.

While many people do take the deduction for their RRSP contribution from the get-go, there’s no rule that says you can’t hold off. In fact, holding off makes sense when you’ll end up getting more money back from the Tax Man by delaying your deduction gratification. So if you’re just starting out and earning not-so-much, don’t bother claiming the deduction… save ‘em up until you’re in a higher tax bracket when you’ll get a bigger bang for your buck.

Life changes are another reason to pause and think… Think…THINK…Take the case of a woman who goes off on maternity leave in the middle of the year. Since her income is dramatically reduced for that year, her marginal tax rate will also be lower. Claiming the deduction for her RRSP would mean frittering away a perfectly good deduction on a low-income year. Better to hold the deduction for a year when her taxable income is back up. Then, even though her RRSP contribution limit would be less (based on the previous year’s earned income, which may have been smaller because she was on mat leave), giving her little room to maneuver when trying to minimize her taxes, her undeducted contribution from the previous year will come in very handy.

Whether you’re having a baby, just starting off in your career, taking a year off to get an MBA or planning a sabbatical, knowing you can delay claiming your deduction without losing it means you can plan to make those RRSP contributions work even harder in terms of the deduction you’ll eventually receive. They also eliminate the excuse, “What’s the point, I don’t pay that much tax now anyway.”

38 comments on “RRSP Myth #2: Annual RRSP deductions are mandatory

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  2. I think that anyone that is visiting MoneySense's website would have at least a basic understanding of topics like these. A column like this would be better suited for perhaps a high school financial literacy course. It frustrates me that sources aren't more focused on their customer base (I subscribe to MoneySense as well), and instead have useless posts made for people who have no financial knowledge.


    • Easy Dave,
      I appreciated the article


  3. I really don’t agree with a young person putting money into RRSP and waiting to make the deduction. Unless the deduction is taken within a few years (like the maternity leave case above) I think it would be better to use the TFSA in the meantime since when you will contribute further down the road, you will have MORE money to contribute since your money would have compounded over the years in the TFSA, tax-free as well.

    Suppose a 25 year-old who will eventually get a higher salary, by planning a little bit, he figures out that he should start contributing 20 years from now. In the meantime, if he puts 5000 every year at 4% net of inflation he will then have around $150,000 than he will be able to put into his RRSP and be able to get the maximum out of his marginal tax rate, or rates according to his salary, instead of the $100,000 (20×5000) unused deductions. That could mean some decent money : $50,000 at 40% marginal rate = $20,000 more in tax return. And it could be more than that since he won’t be able to use the money all at once, it will keep compounding in the TFSA as it takes some out over the next 20 years until he reaches 65. A little planning there can go a long way.

    He should only contribute to his RRSP and not deduct it when he has maxed out his TFSA contribution room.


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  35. These are certainly good thoughts but not very practical for 2 reasons! Regardless of age an RRSP should be based on income level and if you are in the lowest tax bracket you should not do an RRSP! Although most people are savvy enough to understand the RRSP they don’t understand the taxation side of things! So when they get that tax receipt they simply hand it over to their tax preparer and he/she takes the deduction! In addition, it makes much more sense to grow your assets inside of a TFSA tax free which can earn the same growth as if it were inside the RRSP…. then when you hit the higher tax bracket you simply redeem the TFSA and make an RRSP contribution! Lastly, I may have heard of Thamesville Ont but unless I have been there I will likely need google maps to help me get there. if you want a true picture of what retirement is you should be dealing with a financial planner that will put in place for you a financial road map! Ask your current advisor to do this for you! Most will do it for free because they are already charging you fees by investing that TFSA or RRSP!


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