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Should I make an RRSP contribution? I just lost my job!

For many this is a very pressing question. I will preface the answer by saying that everyone’s situation is different and needs to be considered individually.

My recommendation to most people is to make the biggest RRSP contribution as you can or are allowed!

If you have the money, you can contribute it into your RRSP high interest saving account and get a tax deduction on the money you earned last year. You will likely receive a tax refund and you can use that money to cover bills etc. If you find another job right away then you made your RSP contribution and your cash flow is fine. If on the other hand you spend the rest of the year without work you may withdraw the money you put into your RRSP and pay very little tax on it!

Let’s walk through an example: all figures are approximate for example purposes.

Stephanie lost her $70,000 job in January. She is confident that by the end of the year she will be able to find another position. She puts $12,000 into her RRSP and files her taxes in February. In late March she receives her tax refund of approximately $4000.  By late June she is exhasting her savings and still hasn’t found work. Stephanie decides she will start to withdraw $2000 a month from her RRSPs to cover her shortfall. For the rest of the year Stephanie withdraws $12,000 and pays about $1,200 in taxes.

By making the RRSP contribution she gets $4000 back from taxes and in taking out the same $12,000 she only has to pay about $1,200 in taxes. This gives her an extra $2,800 durring a year when every pennies counts.

I should mention two cons of taking money out of the RRSP:

1. You permanently lose that contribution room. You can never put that money back in the RRSP.

2. You will lose the future tax-free growth of that money in the RRSP.

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