You’re likely sitting there thinking: What’s the rush? I’ve still got over two weeks left before the RRSP deadline.
While that’s true (the deadline is March 1, 2018), you won’t be singing the same tune a week-and-a-half from now when you’re swamped at work and have evening and weekend obligations that stretch well into the beginning of March.
Listen, I’m one to put off today what I can do tomorrow as much as the next person. But when it comes to your finances, why not ensure you’re not missing the boat? With the aim of taking full advantage of Registered Retirement Savings Plan (RRSP) season, we’ve put together a handy guide.
But first, let’s look at what an RRSP is and why it’s a good idea to use them.
RRSPs for newbies
A registered retirement savings plan is a government-approved investment account that allows Canadians to save for retirement. RRSP accounts can hold a number of investment types including; stocks and bonds, GICs, mutual and index funds, savings accounts, among others.
First introduced in 1957 as a savings vehicle that allowed tax-deductible contributions, RRSPs reduce the amount of tax a person is required to pay on income and allow capital gains and dividends to grow tax-free while the money remains in the account.
However, Canadians must ensure they meet the RRSP deadline, which falls on March 1 this year, to take advantage of tax breaks for prior year earnings.
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Beating the deadline
The first key to beating the RRSP deadline is to find out how much contribution room you have. For 2018, the RRSP contribution limit is set at 18% of earned income reported on your tax return up to a maximum of $26,230. That upper limit was increased from $26,010 in 2017.
If you only have one source of income, you can make that calculation for yourself. Just multiply your income by 18% (but remember, you can only contribute up to $26,230).
So, if you made $50,000 in 2017, your RRSP limit this year is $9,000. If you made $100,000 last year, your limit is $18,000.
If you have more than one source of income — or if you belong to a pension — it becomes more difficult to determine your contribution limit. Check out our guide to calculating your contribution room for more information.
The Canada Revenue Agency also offers a handy guide to determining your exact limit. You can access that here.
Another thing to remember: Your contribution room carries forward; if in previous years you haven’t maxed out your contribution limits, you can add more to this year’s contribution.
Getting the funds into your account
RRSP season is a busy one for banks. At this point, you likely won’t get an appointment outside office hours, so you might have to schedule one on your lunch hour or on the weekend. If you can’t make the time and don’t want to deal with potentially lengthy walk-in lines, your spouse can go on your behalf – as long as they have power or attorney.
If you don’t already have an RRSP account, you might also consider opening an account with an online bank or robo-advisor, such as Wealthsimple. The process for opening an investment account and transferring funds takes only a day or two.
Either way, you’ll need your Social Insurance Number handy when depositing the money or opening a new account. There is nothing worse than standing in a lengthy bank line only to be told you have to come back at a later date once you’ve got all your info.
Don’t sweat the investment details
Some may avoid hitting the RRSP deadline because they aren’t sure what specific investments their accounts should hold.
But don’t worry. You can make your contribution before the deadline and decide on specific investments after the March 1 cut-off. This will give you time to do research or speak to a financial advisor about the best investment plan for your recent contribution.
Maximize your contribution
So you’ve got quite a bit of room and you aren’t sure how to reach the limit. Some borrow money to top up their RRSP – but that isn’t advisable unless you crunch the numbers with a professional.
You could always move money over from more liquid accounts – say, if you have a high interest savings account or a lump sum in your chequing account – to maximize your contribution and, in turn, your tax return.
The best way to take full advantage of your RRSP contribution room, though, is to develop better habits this year that will help you avoid scrambling to beat the deadline in 2019. Of course, it’s too late to do that for this year’s deadline but, with the stress of this year’s deadline top-of-mind, use that as motivation to develop better habits in the future.
With that in mind, why not set up regular RRSP contributions from each paycheque this year? If you pay yourself first you won’t feel any anxiety leading up to March 1, 2019.
After March 1
You’ve made it. You’ve done your part to help your future self (yeah, you!) and now you await a potentially beefy tax return.
Seriously, cut it out. I know what you’re thinking: That tax return will be more than enough for a trip down south. Or: I would really like a new car. That tax return will make a nice down payment.
What you should do with that return is to invest it back into your RRSP or pay down any high-interest debt. Don’t think of it as a windfall of free money because when the time comes to take money out of your RRSP account, you will have to pay taxes on it – so every extra contribution will help your future-self enjoy a prosperous retirement.
- Transferring to and from your RRSP
- RRSP Contributions vs. Paying Down Debt
- How to Set Yourself Up for a Comfortable Retirement
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