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

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

Answers to your RRSP questions.


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.