A client, Emily, 40, has $20,000 of accumulated unused RRSP contribution room. Her current annual gross income is $70,000. She wants to contribute to her RRSP, but is worried about liquidity. She could contribute $5,000 this year. What would be her net after-tax cost of this $5,000 RRSP contribution, assuming a combined marginal tax rate of 25% on her income directly above the contribution amount?

Question: A client, Emily, 40, has $20,000 of accumulated unused RRSP contribution room. Her current annual gross income is $70,000. She wants to contribute to her RRSP, but is worried about liquidity. She could contribute $5,000 this year. What would be her net after-tax cost of this $5,000 RRSP contribution, assuming a combined marginal tax rate of 25% on her income directly above the contribution amount?

Answer options: ✅ $3,750

• $5,000
• $1,250
• It depends on her other deductions and credits.

Correct answer: $3,750

Explanation: The net after-tax cost of an RRSP contribution is the contribution amount minus the tax savings. With a $5,000 contribution and a 25% marginal tax rate, the tax savings are $5,000 * 0.25 = $1,250. Therefore, the net after-tax cost is $5,000 - $1,250 = $3,750.