Budgeting for RRSP Changes

There is talk the Finance Minister Paul Martin is going to deliver personal income tax reductions in the federal budget this month.

One of the consequences of such a change is the value of a RRSP contribution diminishes. This may be the year to take advantage of any unused contribution and fully maximize your RRSP.

One of the biggest advantages of the RRSP is the immediate tax deduction you receive as a result of a contribution. Alberta is fortunate to have one of the lowest tax rates in the country. If you earn less than $6,465, you will pay no tax. Income between $6,465 and $29,180 will be taxed at a 26 per cent (federal and provincial combined) marginal tax rate. Income between $29,181 to $59,180 is taxed at a 40 per cent marginal tax rate and for every dollar you earn above $59,181 you will give 46 cents to the government.

Depending on which income bracket you are in, a RRSP contribution will benefit you at the same rate as your marginal tax bracket. For example, if you earned $40,000 per year, every dollar you commit to your RRSP will allow you to save 40 cents in taxes.

Naturally, if the tax rates are lowered then so will the value of your tax benefit.

Many financial institutions have very creative loan programs allowing you to maximize unused RRSP contribution limits and spread the payments over a period of time longer than the traditional 12 months. While this may not apply to everyone, you will need to look at what income tax bracket you fall into today and in the future to make the best choice.

Talk to your financial advisor to see if borrowing to maximize your RRSP contribution makes sense for you.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace.For more information you can follow him on Twitter @JimYih or visit his other websites JimYih.com and Clearpoint Benefit Solutions.

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