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Dear Nancy Woods

I have built up a lot of unused RSP contribution room to the tune of $80,000. I have received an inheritance where I now have the funds to contribute. My income is moderate at $60,000. How much should I contribute? Does it make sense to use up all the contribution room at once or just some of it?

Signed Natalie

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Dear Natalie,

The main issue with contributing to an RSP is "how much are you allowed to contribute?"

As long as you are not over-contributing and are staying within your annually established limit, which is determined by a formula against your income, you may put money into your RSP.

The bigger question is when and how much of a deduction from your income should you declare?

If you contribute the total amount of unused RSP room in the amount of $80,000, you should only deduct enough to bring you down to where you pay no income tax.

So in your case, in the simplest terms, you would deduct approximately $48,000. There is the basic personal deduction of approximately $12,000 and thus making it that you pay zero income tax. The remaining $32,000 that you have not deducted will be carried forward to future taxation years when you have income and choose to declare the remainder of the deduction.

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Bottom line is that you can deduct any amount of your contribution from your income that makes the most sense to you. You may instead choose to deduct just enough to bring you to a lower tax bracket, thereby saving some of the deduction for a future high income earning year.

The good thing is, that in the meantime, your contribution can grow and/or earn income within the tax shelter of the RSP tax free.

This is something that I often point out to my clients who have children (going to post-secondary school), who have part-time or summer jobs. Their income gives them an RSP contribution allowance. They probably are in the lowest tax bracket already or not paying any tax. They should still contribute what they can to an RSP and let it grow tax free. Then when they are earning income at a higher level, use the deduction that they made in the past.

This advice is usually after I have made sure that they have a tax free savings account (TFSA) and contributed the maximum to it first.

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Nancy Woods is an associate portfolio manager and investment adviser with RBC Dominion Securities Inc. Visit her website www.nancywoods.com or send an email request to asknancy@rbc.com. You can also send your questions to asknancy@rbc.com.

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