This was the year you were finally going to start your RRSP. Maybe it was one of your financial new year’s resolutions. Maybe you received an inheritance or found some money. Or maybe you saved up a little bit extra all year long. But now that it’s tax time, you’ve gone to invest it – only to find out you missed the deadline. Rats!
Wait, there was a deadline?
While RRSP contributions are welcome at any time of the year, there is a deadline if you want to be able to count them on your taxes. Savers have until March 1st of most years to make RRSP contributions and use them to get a deduction on the previous year’s taxes. Even though there’s still some time before you need to have your taxes in, the March 1st RRSP deadline is already long gone.
What happens to contributions now?
The same thing as always. Your RRSP contributions can be invested any way you like – you can use stocks, bonds, GICs, ETFs, and even robo-advisors. The only difference is you can’t use them to reduce your taxable income for last year. Any RRSP contributions you make now will be counted on this year’s taxes and reduce your taxable income in the current year.
The case for saving throughout the year
In a previous blog, I argued there is no such thing as RRSP season – and I still believe that to be the case.
The concept of saving up all year and making your RRSP contributions in the first two months of the year is really only for advanced investors. The way that the RRSP rules are set up, you can’t know your contribution limit with 100% certainty until the year is over. And, once you know your total income for the year, you’ll be able to adjust your RRSP contributions to maximize your tax savings.
But for the average person like you and me, there’s no good reason to do this. Together, Canadians have billions of dollars in unused RRSP contribution room. Unless you’re maxing out your RRSPs every year, you probably don’t have to worry about going over the contribution limit. And if you make a moderate income, you will probably be happy with any amount of tax savings and not see any real benefit from holding back on contributing to your RRSP.
Instead, you’ll be much better off making regular contributions every month (or better yet, every time you get paid), to make sure that your RRSP is well-funded and to take advantage of compounding. If you invest $100 with every bi-weekly paycheque, you’ll already have earned $74 in investment income by the end of the year, assuming an annual return of 6%.
Over 30 years, your RRSP will be worth almost $6,000 more if you save $100 bi-weekly than if you save a $2,600 lump sum once annually.
What if I am up against my contribution limit?
If you’re one of the few who have maxed out your RRSP contribution limit, congratulations – that’s a very good problem to have.
Fortunately, your unused RRSP contribution room from last year will carry forward to this year. You can make the contribution now, or hold on to it until the end of this year and make one big contribution before next year’s March 1st deadline. If you decide to save outside of an RRSP, you can use a short-term GIC to keep the money safe or invest it in a high-interest savings account.
You can also decide to use this as an opportunity to shore up your tax-free savings account (TFSA) instead. Investing in a TFSA doesn’t have quite the same tax advantage as investing in an RRSP, but it does allow your savings to grow tax-free. With a TFSA, you also have the option to withdraw money at any time without penalty, so you can always move the money from your TFSA to your RRSP later on.
Don’t miss the deadline again
If you missed the RRSP deadline, that means you didn’t contribute to your RRSP at all last year, and that’s the real problem. The best way to secure a solid retirement for yourself is to give your savings lots of time to grow. When you don’t contribute to your RRSP, you’re robbing yourself of the investment income you could have earned.
So keep an eye on that RRSP deadline and make sure you don’t miss it again. Chances are the RRSP deadline isn’t important to you, but saving money in your RRSP is.