Should Dave contribute to an RRSP this year?


The answer to this question sort of depends on which tax bracket you're in. If you're in the lowest tax bracket, or even second lowest, it's less important to put money into an RRSP because you'll be in the same tax bracket when you take it out again. Your contribution limit compounds, so it's not like you need to worry about missing an opportunity to put money into an RRSP. You're better off contributing to an RRSP later in life when you're paying more taxes so that when you retire you take the money out in a lower tax bracket and pay less income tax.

Don't forget that you can also withdraw from RRSPs tax free to buy a house. Also, the sooner you start, the better. The amount you'll gain with interest is surprising.

Bear in mind, though, that the withdrawal from an RRSP for the purpose of buying a house may be tax-free at the time that you make the withdrawal but you have to either pay it back within a certain time period or you have to pay tax on it. So, it isn't really tax-free.

From what I've heard, that time period is usually pretty long. I'm not entirely sure about the rules, but I was talking with someone who used their RRSPs as a downpayment, and they had something in the order of 10 years, or more, to repay them, if memory serves).

Looks like the repayment period is 15 years.

However, since it looks like I'll be paying little to no tax (about $50 of provincial tax if I don't include tax deductible donations this year but instead carry over those donations to the 2007 tax year). Thus it seems that there's little incentive for me to start up an RRSP this year, since it seems that I can carry the contribution limit forward.