Registered Retirement Savings Plan (RRSP) contributions are one of the last opportunities Canadian taxpayers have to affect their 2022 tax position.
With the deadline for contributions falling on March 1 of each year, now is the perfect time to review your financial goals and consider contributing to your RRSP before the deadline. In this blog, we’ll answer some of the most common RRSP questions.
What is an RRSP?
An RRSP is an investment account that’s designed to help Canadians save for retirement. It allows individuals to contribute a percentage of their income, up to a certain limit, and receive a tax deduction for the contributions.
The funds in your RRSP grow tax-free until they are withdrawn in retirement, at which point they are taxed as income.
The contribution limit for RRSPs is based on the previous year's income, up to a maximum of 18% of earned income, to a maximum of $29,210 for 2022 and $30,780 for 2023. However, if you did not contribute the maximum amount in previous years, you can carry forward any unused contribution room indefinitely.
Why Contribute to an RRSP?
There are many reasons why contributing to an RRSP can be a smart financial decision. First and foremost, it can help you save for retirement, which is something that everyone should be planning for regardless of their age.
In addition to the long-term benefits of saving for retirement, there are also immediate tax benefits to contributing to an RRSP. When you make a contribution, you can deduct the amount from your taxable income for that year. This can result in a lower tax bill, which can be a welcome relief for many Canadians.
Another reason to consider contributing to an RRSP is that it can help you achieve other financial goals. For example, if you’re saving for a down payment on a house or you or your spouse are planning to return to school, you can withdraw funds tax-free, so long as they’re paid back in the allotted time frame.
Who Can’t Contribute to Their RRSP Before March 1
Individuals who were 71 years old or older as of December 31, 2022, can no longer contribute to their RRSPs, even with the March 1 deadline. That is because we are required to convert our RRSPs by the end of the year in which we turn 71.
How to Make Contributions to Your RRSP
There are a variety of ways to make contributions to an RRSP. You can set up a regular contribution plan with your bank or financial institution, which will automatically deduct a set amount from your bank account each month. You can also make lump sum contributions at any time throughout the year.
When making contributions, it's important to keep in mind the contribution limit for the tax year. If you over-contribute to your RRSP, you will be subject to a penalty tax of 1% per month on the excess amount.
In addition to contributing to your own RRSP, you may also be able to contribute to a spousal RRSP. This is an RRSP that is in your spouse's name, that you contribute to on their behalf. Contributing to a spousal RRSP can be a smart tax planning strategy, as it allows you to split your retirement income with your spouse and potentially reduce your overall tax bill in retirement.
What to do if You Can't Afford to Contribute to an RRSP
While contributing to an RRSP can be a smart financial decision, it's not always feasible for everyone. If you find yourself in a situation where you can't afford to make a contribution before the March 1 deadline, there are still other steps you can take to plan for retirement or other major financial events.
Firstly, you can always contribute to an RRSP later in the year. While you won’t benefit from a tax deduction on your 2022 tax return, you will receive a deduction for the 2023 tax year.
Another option is to review your current spending habits and make adjustments so you can free up some money for retirement savings. This may mean cutting back on discretionary spending or finding ways to save on everyday expenses like groceries and utilities.
Another option for saving money is a Tax-Free Savings Account (TFSA). While a TFSA doesn't offer the same immediate tax benefits as an RRSP, it does allow your investments to grow tax-free, and any withdrawals are tax-free as well.
TFSAs can be a great tool if you’re planning on using the fund in the next few years as you don’t have to worry about additional tax consequences and you’ll get your contribution room back the following year, which is not the case for RRSPs. With RRSPs, once you make a withdrawal, the contribution room is lost forever (with a couple of exceptions).
If you are trying to save for a house, you can also consider the new First-Home Savings Account (FHSA) which will be available starting in April. This plan allows you to save up to $8,000 a year for a total of $40,000 after five years. The funds are tax deductible upon deposit and no tax is paid upon withdrawal, so long as the funds are used to buy your first home.
If you still aren’t sure what to do, consider seeking the help of a chartered professional accountant. An accountant can help you review your current financial situation, set realistic retirement goals, and develop a plan to achieve those goals. They can also help you understand the tax implications of different investment strategies and recommend investment options that are best suited for your individual needs and risk tolerance.
Planning for retirement is a critical aspect of financial planning, and the RRSP deadline serves as an important reminder to take action. While the deadline is fast approaching, it's never too late to start planning for retirement.
For help planning for your future and optimizing your tax return, contact Koroll & Company today.
