Low Income Families and RRSP’s

We read all of the time about tax tips and strategies that high income earners should follow each year, but in my financial planning practice, I also have the pleasure of dealing with families and young couples, who are not what we would label as having a high net worth. Interestingly though, there are some cool strategies for these folks that can generate bigger tax refunds as a percentage than even the wealthy are able to attain.

Consider this scenario. An example is a couple with a single family income of $35,000.00/year, with 2 children between the ages of 7 and 11, living in Alberta. Some might ask whether or not this couple should even consider contributing to an RRSP, their income is low and money is probably very tight but my advice would be an absolute yes to contributing. If they do not have the funds themselves but have parents or grandparents that would be willing to contribute to an RRSP on their behalf, this could be one of the most helpful ways of passing a gift along.

Why? In Alberta, those who earn under $40,000.00 are in a 25% tax rate, so for every $1,000.00 that is put into an RRSP they will receive $250.00 back. A $2,000.00 RRSP contribution for this couple, would net them a $500.00 refund for them on their taxes.

What most people don’t know is that by making an RRSP contribution, they also lower their income that is used to determine child tax benefit. If this couple put a $2,000.00 RRSP contribution in a year, it would increase their child tax benefits each month by $42.08 or $504.96 per year. That’s right! A $2,000.00 RRSP contribution would generate between a child tax benefit and tax savings, the amount of $1,004.96. That is a 50% refund!

It is also interesting to note, the person earning $150,000.00/year, making a RRSP contribution, at most, will only receive back 39%. So those people receiving child tax benefit, it is in your very best interest, to make a RRSP contribution as much as you can in the years that your children are at home. Try to do whatever you can and if possible start it at $100.00/month. You will reap the rewards!