Reader Mike has a question on withdrawing a recent contribution from his RRSP:
On the morning of March 1st, I contributed an extra $3500 to my TD eFunds RRSP account. However, for some reason it didn’t go through until March 2nd. So, I will not get the tax savings for tax year 2006. How annoying!
Considering that I parked the whole $3500 in a Money Market fund (due to my thought that there’s too much market risk right now), does it make sense for me to redeem the $3500 and put it on my mortgage (5.1% rate)? My thinking is that when I do my 2007 taxes, the extra tax for $3500 RRSP redemption will be exactly offset by the $3500 contribution, right?
Or do I have to pay the tax on the $3500 immediately, at time of redemption?
I am not sure about your exact situation but there are two problems with your strategy:
- Withholding taxes: As each withdrawal of up to $5,000 will attract a withholding tax (16% provincial tax and 5% federal tax in Quebec and 10% tax in the rest of Canada), you’ll be left with $3,150. You are correct that the $3,500 contribution for 2007 and the $3,500 withdrawal, which is treated as income, will offset exactly.
- Lost contribution room: The bigger problem is that $3,500 of your contribution room is lost forever.
While it is annoying that you have to wait almost an year for your refund, your strategy sounds like a lot of hassle to save, at best, a hundred dollars or so. Also, I am not a tax expert but you might be able to get a tax refund in the current year by submitting a request to reduce tax deduction at source with the CRA. Hopefully, our knowledgeable readers will have more comments on your question.