Just like that, it’s February.
The holidays are over. Groundhog Day has passed. It’s now super awkward to greet someone with “Happy New Year.” And all the calendar stores in the malls have cleared out to make room for tax accountants.
Yes, February means it’s time to start thinking about your taxes. More specifically, February is Registered Retirement Savings Plan (RRSP) season. Whether you’ve been making regular contributions or you’re planning one big lump sum (or even if you haven’t thought about it at all), now is the time many Canadians turn their attention to their RRSP.
If you’re thinking about putting money in your RRSP this month, here are three things to know about your RRSP contribution.
Your contribution gives you a break on your taxes
This is RRSP 101, but it bears repeating. For every dollar you contribute to your RRSP, you get to take a dollar off your taxable income for the year. So if you earned $50,000, and put $1,000 in your RRSP, you only have to pay taxes on $49,000 of income.
If you work a normal full-time job and your taxes are uncomplicated, contributing to your RRSP likely means you’ll get money back in the form of a tax refund. If you’re in a situation where you’re more likely to owe tax at the end of the year, like if you’re self-employed, making an RRSP contribution can reduce the amount of tax you might have to pay.
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The amount you’ll save depends on your marginal tax rate, which in turn depends on where you live and how much money you earned. If you want to find out how much you’ll save in taxes, you can use an RRSP refund calculator. Or, find your marginal tax rate and multiply it by the amount of your RRSP contribution.
Continuing the example above, a person living in Ontario and earning $50,000 per year would have a marginal tax rate of 29.65%. A $1,000 RRSP contribution would save them $296.50 in tax for the year.
You don’t have to max out your contribution, but there is a limit
Yes, there is a limit to how much you can contribute to your RRSP. Your RRSP contribution limit is calculated based on your earning and contributions in previous years. It can also be affected by other things like an employer-sponsored pension plan. And those with exceptionally high incomes are limited by an annual maximum set by the government.
The easiest way to find your RRSP contribution limit for the year is to check your latest notice of assessment. That’s the summary the CRA sends you after you file your taxes, telling you what changes they’ve made and whether you still owe anything. If you don’t have a paper copy of your last notice of assessment, you can find it online at the CRA website.
The good news is you don’t have to use your entire RRSP contribution limit. You can carry forward unused portions to future years. This is beneficial because you can earn contribution room in years when you earn less income, but then use the contribution room in future years when you’re earning more money and therefore have greater tax savings.
But there are penalties for going over the limit. The CRA will fine you 1% of your excess contribution per month. That’s $10 per month for every $1,000 over your contribution limit – or $120 per year. There is a safety net that allows you to over-contribute up to $2,000 over the course of your lifetime without penalty, but it’s best to be mindful of your limit and stay within it.
You still have time — but there is a deadline
It’s been just over a month since 2017 came to a close, but you still have time to make your RRSP contributions for the year. The 2017 RRSP contribution deadline is March 1, 2018.
Any money you contribute to your RRSP between January 1st and the deadline can be counted toward your 2017 or 2018 tax year. The advantage to this is you now know exactly how much income you earned in 2017, and you can work out the right amount to maximize your tax savings. It also gives you a little extra time to make a contribution if you haven’t already.
Go forth and contribute
The most important thing to know about your RRSP contribution, however, is that any contribution you make now will help set you up for a successful retirement.
You don’t need to be a math wiz or know about taxes to benefit from an RRSP. Your accountant can help you figure out your optimal RRSP contribution, but you don’t have to worry about any of that if it looks too complicated. All you need to do is open an account (online investment providers like Wealthsimple make it really easy), and start saving money.
As long as you’re saving some money, you’re doing yourself a favour.
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