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You still have a few months until the next RRSP deadline (March 1, 2020), but that doesn’t mean you shouldn’t start making contributions right now! Make use and calculating what you can do until the next deadline means you can still lessen this year’s income tax while plan for retirement.
RRSPs might seem a little complicated to those unfamiliar with the highly beneficial savings tool. That’s why this guide will provide everything you need to know about RRSPs and how to make the most out of the next three months before the RRSP deadline comes around.
What is an RRSP?
The Registered-Retirement Savings Plan (RRSP) is a registered, tax-deductible, and government-approved savings account designated primarily for retirement savings.
Making contributions to an RRSP reduces the amount of income tax a person pays on their income each year. It also allows investments to grow tax-free. As mentioned, RRSPs are registered accounts, meaning interest or any gains deposits are untaxed. The account, however, comes with a yearly contribution limit, known as the RRSP contribution limit. Your annual contribution limit depends on your income bracket.
Funds are locked in and taxed on withdrawal. Interest earned below the annual contribution limit also grows tax-free. Canadian citizens can hold several types of investment, such as stocks, bonds, Guaranteed Investment Certificates (GICs), mutual and index funds, and regular savings, among others.
How the RRSP deadline works
An RRSP deadline is the last date that a Canadian citizen can contribute to an RRSP and receive the tax return for that year. As of 2019, the RRSP deadline is March 1, 2020.
While you are allowed to contribute to your RRSPs until you are 71, the RRSP deadline predominantly pertains to contributions towards reducing your yearly income tax. That means contributions made after the deadline will go towards reducing your income tax for the following year.
Your contribution room also carries forward; if you haven’t maxed out your contribution limits in previous years, you can add more to this year’s contribution limit.
How to choose the right RRSP account
Some Canadians avoid hitting the RRSP deadline because they’re not sure which specific investments their accounts can hold. That said, many Canadians also forget that their RRSPs can hold both savings and investments. Since money can grow tax-free, it’s a good idea to max out your RRSPs before investing in taxable accounts.
When choosing a suitable RRSP savings account, picking one with an interest rate that exceeds 2% is the standard. This keeps deposits in pace with the Canadian inflation rate.
In terms of RRSP investment accounts, you may want to consider opening an account with a robo-advisor, such as Wealthsimple or an online brokerage like Questrade. Keeping ETFs and stocks in an account can see significant growth over decades of regular contributions.
It’s important to note that RRSPs do not permit tax-free withdrawals or any other noticeable perks. That’s why locking in a good interest rate is crucial—especially with an account that includes contributions over a lifetime.
How to beat the RRSP deadline
With three months left until the beginning of the next RRSP deadline, the time to start planning how much to contribute before the deadline has never been better.
Knowing what your RRSP contribution limit is the first step. Generally, a rule of thumb indicates that you can contribute up to 18% of your annual income.
Next, you’ll need to find out how much you can contribute from each paycheque until the deadline. It’s important that you’re realistic about how much you can contribute. Urgent expenses should be met, and contribution to an emergency fund are things you’ll want to consider first.
Finally, calculating the amount you can contribute to each month can give you a better understanding of how much you can save—and what you can contribute next year.
What to do with your tax return
Naturally, spending your tax return on luxuries is the knee-jerk reaction many of us have—especially when the sum is large. There are, however, several strategic moves that can benefit you and your finances in the long-run.
The first and most important financial decision one can make with a tax-return is paying off any evolving debt. Unpaid revolving debt, such as credit card debt, will actually cost you more in the long run.
No debt? No problem. What you can do with your return is to invest it back into your RRSP, which will decrease what you owe in taxes for the next year. Just familiarize yourself with the RRSP withdrawal rules. They are quite costly, so it’s important that any immediate expenses are covered before you deposit money into a locked account.