With the March 1 deadline to contribute to an RRSP for the 2021 tax year fast approaching, you may have questions about how to make your RRSP work best for you.
We know trying to figure out the written and unwritten rules of RRSPs can be overwhelming, so we’ve compiled a list of everything you need to know—and if you still have questions, we’ll be here to help!
What is an RRSP?
A Registered Retirement Savings Plan (RRSP) is a plan that you establish and register through the Canada Revenue Agency (CRA). You and/or your spouse or common law partner can contribute to this plan, and income you gain through interest is usually exempt from tax as long as the funds remain in the plan.
You can set up an RRSP through a bank, credit union, trust or insurance company. Each institution may have different types of RRSPs available, including:
- Individual RRSPs, set up by and for one individual
- Spousal RRSPs, which ensures retirement income is more evenly split between spouses or common law partners
- Self-directed RRSP, which allows you to build and manage your own investment portfolio by buying and selling a variety of different types of investments
Other types of RRSPs include Group RRSPs, which are set up by employers, and Pooled RRSPs, which are available for small businesses and self-employed individuals.
When should I contribute to my RRSP?
The ideal time to contribute to your RRSP depends on your situation. While the deadline to contribute to your RRSP this year is March 1, 2022, there are a few factors to consider when deciding whether or not you should make a contribution, including:
- How much taxable income you received in the 2021 tax year
- How much taxable income your spouse or common law partner received in the 2021 tax year (if applicable)
- Whether or not you’re likely to withdraw money from your RRSP in the near future
If you have enough taxable income from the 2021 tax year and you’re expecting to owe money after filing your taxes, contributing to your RRSP can reduce that tax bill, as your contributions are deductible from the income.
BUT, if you then need to take that money back out in the near future, that money will be considered income, meaning that the next time tax season rolls around, you’ll need to pay income tax on it.
If you’re not sure whether or not contributing to your RRSP is a good idea, we’d be happy to help you figure it out. Contact us for advice before the March 1 deadline.
How much should I contribute to my RRSP?
When deciding how much to contribute to your RRSP, take into account:
- Your contribution limit
- The value of tax savings the contribution will generate
- How much money you can afford to put away without accessing it
Again, making the right decision about your contribution amount is all about balancing the value you’ll gain with the amount you can afford to put away. If that feels confusing, you’re not alone! We’re here to help you find that balance and hit the sweet spot that will keep the present-you and future-you happy and financially healthy.
Contact us for advice before the March 1 deadline.
What is a contribution limit and how do I know what mine is?
Your RRSP contribution limit is the amount of money you’re able to contribute without penalty. It is based on your prior years’ earned income (including employment income, self-employed net income, CPP/QPP disability payments, and net rental income) less contributions. If you do not fully use all of your contribution limit, the unused amount carries forward.
It is crucial to check your contribution limit before contributing to your RRSP this year. There can be significant penalties and interest if you over-contribute, so be sure to double-check that you have room left to contribute in the current tax year!
If you don’t know what your limit is, you can find it in one of the following places:
- Line (A) of the RRSP Deduction Limit Statement included on your 2021 Notice of Assessment or most recent Notice of Reassessment
- Using My Account on the CRA website here
- Using MyCRA mobile app
- Call the Tax Information Phone Service (TIPS) at 1-800-267-6999
- Contact RHN CPA and speak with one of our professional staff
How much will RRSP contributions reduce my tax bill?
How significantly your tax bill will be reduced by an RRSP contribution is dependent on your income tax bracket for the year as well as how much you’re able to contribute.
For example, if you are in the lowest combined income bracket and pay 20.06% tax, you’ll save $0.2006 for every dollar you contribute.
If you are in the highest combined income bracket and pay 53.5% tax, you’ll save $0.535 for every dollar contributed.
Either way, it can add up pretty quickly—if you’re able to contribute a decent amount that you won’t need to access in the near future.
Keep in mind the RRSP contribution only reduces your taxable income by the amount you contribute.
For example, if you earned $50,000 and you made a $10,000 RRSP contribution, you would still be left with $40,000 of income subject to tax.
Since tax withholdings were made on your employment income at source (and it is the only income you are reporting), you should expect to receive a refund on your tax return at the applicable tax rate for the $10,000 RRSP deduction.
Contributing to your RRSP before the March 1 deadline can lower your tax bill—that’s something to celebrate!
Is it advisable for a young person to contribute to an RRSP?
You can make an RRSP contribution one year after reporting earned income for the first time.
While many younger professionals aren’t yet thinking about retirement, it can actually be valuable to start making contributions early on. Again, whether this is advisable for you depends on your short and long-term goals.
If you’re saving for school, traveling, or a major purchase, you may opt not to put money in an RRSP since you won’t be able to access it without tax implications.
However, if you’re in a place where you can afford to put a little away here and there without missing it, an RRSP may be a great option!
If you’re not sure whether an RRSP is a good fit for your current situation, contact us and we can help you decide.