No matter what stage you’re at in life, it’s always important to think about retirement. Planning for your Golden Years should start when you’re young. That way, you have plenty of time to build a comfortable nest egg to cover all the costs of living after you’ve stopped working.
And RRSPs can be a great way to provide you with the funds you need to live comfortably in retirement. But aside from this, they can also be a great way to hedge your savings from being heavily taxed.
Let’s talk a little bit about RRSPs and RRSP season, and how they can help you save money come tax time.
What Are RRSPs (Registered Retirement Saving Plan)?
RRSPs are special types of investment accounts that can help you save for retirement. The main advantage of an RRSP compared to other investment accounts is the tax benefits.
How Can RRSPs Help You Save Money at Tax Time?
The deadline to file your taxes is April 30 of every year. By the end of April, you’ll need to have filed all your taxes and pay any money you owe. If you’re lucky, you might get a little something back from the CRA.
Every year, you’ll have the opportunity to contribute a portion of your income to your RRSPs. But it’s important to understand what your limit is before you contribute.
Generally speaking, you can contribute a maximum of 18% of your income from last year. So, if you earned an income of $70,000, you’d be eligible to contribute $12,600 (18% of $70,000).
If you use RRSPs wisely, they can lower your annual tax bill. The money you contribute will be sheltered from taxes.
In addition, that money will be able to grow tax-free until you withdraw it at retirement. Plus, there are tax deductions to take advantage of when you file your taxes.
If you’re in a high tax rate bracket, the amount of taxes you pay every year is likely high. But regularly contributing to your RRSPs can lower the amount of taxes you pay.
They may even allow you to get a refund on taxes you’ve already paid. Plus, you’d be building a retirement income stream.
When is RRSP Season?
Not only is it important to understand what your RRSP contribution limits are, but it’s also helpful to understand when RRSP season is. The deadline to contribute to your RRSPs is March 1st of each year. Any money contributed to an RRSP before March 1 counts as though they were made during the previous tax year
Essentially, any money you contribute in January and February can help you reduce your tax liability for the previous year.
However, you’re allowed to contribute to your RRSPs throughout the year. So you might even consider RRSP season to be all year long.
But, there are certain exceptions to this rule, such as being self-employed or part of an employer RRSP Matching Program at work. In these cases, you’ll want to understand what your situation is so you don’t get slapped with penalties for over-contributing.
Should You Contribute to RRSPs?
While RRSP contributions might be a great retirement investment vehicle for some, others might wonder if they’re worth it. Should you care about RRSPs or RRSP season? That all depends on what your financial and retirement goals are.
Many factors are involved in how much you should contribute or whether you should contribute at all, including the following:
- Your age
- When you want to retire
- Your long-term goals
- The value of your assets
- The amount of debt you’re carrying
- What you want to leave behind to your family when you’re gone
Living off of your pension won’t be enough to live the way you’re living right now when you’re retired. You’ll need other sources of income, and RRSPs may be able to top up your income.
What Are the Biggest Benefits of RRSPs?
There are plenty of great reasons to start an RRSP and contribute to it regularly, including the following:
- Tax savings and retirement income. This is the reason that these programs started in the first place decades ago.
RRSPs can save you on taxes so you can pay them at a lower tax rate down the road. At the same time, you’re building a nice retirement fund.
- Homebuyer’s Plan (HBP). If you plan to buy a house in the near future, you can use the money from your RRSP for a down payment.
Under the Homebuyer’s Plan, you can make tax-free withdrawals up to $25,000 as long as you meet certain criteria. Just understand that you will have to pay back this money into your RRSP eventually.
- Lifelong Learning Plan. If you plan to go back to school later in life, a Lifelong Learning Plan can provide you with the money needed to cover these costs.
This program is great if you’re planning a career change at some point because it can help you finance the additional training needed. You can withdraw up to $10,000 per year from your RRSPs, and the total amount you can withdraw is $20,000 over four years.
Plus, all withdrawals are tax-free. But, you’re going to have to pay that money back. At least 10% of the funds borrowed must be paid back every year for a maximum of 10 years.
What Other Options Are Available Besides RRSPs?
RRSPs are great for saving for retirement and lowering your taxes, but they may not be for everyone. For instance, if you want to be able to access a source of money to pay for a large expense, an RRSP isn’t the source to tap into. In this case, you may want to look into a TFSA (Tax-Free Savings Account).
A TFSA account doesn’t apply taxes on any contributions you make or interest earned. You can even withdraw them tax-free without penalty. You can then use the funds for any purpose you see fit.
Final Thoughts
There are obvious advantages of starting an RRSP account and contributing to it regularly. You can save up a hefty sum for retirement and tax advantage of tax breaks. But how much you contribute depends on what stage you’re at in life and what your long-term goals are.
There are different investment vehicles that you can look into. As such you’ll want to speak with a financial or tax advisor to find out what option works best for you.
