Isn’t it too soon? Didn’t we just spend the entire summer complaining that we weren’t ready for back-to-school commercials? Can’t we just wait until the holiday season is behind us? Why do we have to talk about RRSPs now? That’s supposed to be a January/February thing, isn’t it?
Ready or not, RRSP season is coming up. It’s the two-month period between the start of the year and the deadline to make RRSP contributions (the 2017 RRSP contribution deadline is March 1, 2018).
Some Canadians wait until all their income for the year has come in so they can figure out just the right amount to contribute to their RRSPs to maximize tax savings. And others put off saving because they forgot about it. It can feel like a bit of a mad dash and making one big annual deposit can make budgeting difficult, so this year is the year to get ahead of it.
The reason so many people wait until RRSP season is that every dollar you contribute to your RRSP is taken off your income for taxation purposes. So if you make $50,000 and contribute $1,000 to your RRSP, you’re taxed as if you made $49,000. At a marginal tax rate of 28.2% (we’ll use British Columbia as an example), that $1,000 contribution will result in a $282 income tax refund. Not bad.
But as you contribute more, your returns are diminished because you’re taxed at a lower rate the less money you make. Continuing to use B.C. as an example, the marginal tax rate is 28.2% for income between $45,916 and $77,797. But it’s only 22.7% for income between $38,898 and $45,916. If you make $50,000 and contribute $5,000 to your RRSP, you’ll get a 28.2% tax break on the first $4,084, but only a 22.7% tax break on the remaining $916.
|Scenario #1||Scenario #2|
|2017 tax savings||$1,359||$1,152|
|2018 tax savings||$0||$258|
|Total tax savings||$1,359||$1,410|
As you can see, by waiting a year and contributing that $916, you can get an extra $51 in tax savings ($1,410 – $1,359 = $51) in the form of a refund. Alternatively, you can contribute the full $5,000 and claim $4,084 for the 2017 tax year and claim the remaining $916 in the 2018 tax year or later.
If you want to be wealthier in retirement, the better strategy is to contribute to your RRSP as soon as possible instead of waiting until the last minute. Compounding will help your savings grow over time and every month your money stays invested is a chance for it to grow.
So what does this mean for how to get ahead of RRSP season?
The first thing you’ll want to do is decide what strategy you want to take with your RRSP—contribute now or later.
Whichever strategy you choose, you’ll need to find out your available contribution room by checking your notice of assessment, logging into your Canada Revenue Agency (CRA) account, or calling the CRA. Unused contribution room carries forward so unless you deposit the maximum amount every year, you probably have a decent amount to work with. But if you go over the limit, you’ll be subjected to 1% monthly penalty. There’s also a lifetime over-contribution limit of $2,000 so you have some extra room in case you contribute too much.
If you want to begin contributing as soon as possible, decide whether or not you want to make a lump-sum contribution. You can also choose to make contributions once a month or each time you get paid. Set up an automated savings plan with your RRSP provider to automatically move money to your RRSP from your bank account so you don’t forget.
If you wait until the 2017 RRSP deadline, you risk forgetting, running out of time, or spending the money before you can save it. What’s more, giving your money even just a few extra months to grow will help you maximize your investment income over the long term.
If I can offer one more piece of advice, it’s don’t wait to get started on next year’s RRSP contributions. Start early and make regular contributions throughout the year. Even if you contribute just $25 a week to your RRSP, it will be worth more than $100,000 in 30 years at a 6% annual growth rate. The important thing isn’t to contribute a lot of money, it’s just to get started.
Instead of waiting until the RRSP deadline, get ahead of the game. Start planning now, get in the habit of making small contributions on an ongoing basis, and make RRSP season something everyone else worries about while you sit back and relax.
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