RRSP or the Registered Retirement Savings Plan is a great tool for Canadians to save money especially because RRSP contributions are tax deductible allowing you to delay paying tax on that income until your retirement (when you will most likely be in a lower tax bracket).
Standing in the 2020-21 season, even with these tax saving benefits, a surprisingly low number of Canadians are taking full advantage of this savings vehicle. That can be understandable this year, especially with the raging pandemic and the high cost of living, but what about the years before?
Remember, even small contributions to a RRSP can compound beyond your expectation. To help you get started, our Trust Life financial advisors have put together this list so you can make the most of RRSP investments and save tax this season.
Should you contribute or not?
When deciding whether you should contribute or not, consider the tax saving benefits that come with your RRSP contribution.
Every dollar you contribute comes off your taxable income. For example, if you have a taxable income of $70,000, and you contribute $10,000 to a RRSP, you will only be taxed on $60,000, thus, saving you a considerable sum on your tax bill.
Also, keep in mind that the RRSP is not just for retirement. The Government allows you to make penalty-free withdrawals to finance your education, buy your first home, etc. with the condition that you return the money to your account over a certain period of time.
Make regular contributions
As far as RRSP investments is concerned, a regular plan can be your best bet. It is much easier to come up with $100 per month than coming up with $1200 at the end of a year.
Also, by contributing regularly, your money will start working for you sooner thanks to its compound growth.
Consider spousal RRSP
Your marriage can function as an excellent tax shelter. The idea behind contributing to spousal RRSP investments is to equalize family income, leading to big tax savings. Talk to your advisor to know more about spousal RRSP.
Do not forget to name a beneficiary
RRSP gives you the ability to receive the value of your plan after you are gone. Naming a beneficiary can help you save on your estate probate fees (meaning, the legal cost involved in the validation of your last will and testament).
Consider taking an RRSP loan
The idea behind RRSP loan is to borrow money to save money. Yes, like a paradox!
While it is not suitable for everyone, below are some circumstances when it can work out well:
- You have turned 71 and want to top up your RRSP before the deadline so you can close or convert your RRSP.
- You are expecting your taxable income to fall below a lower tax bracket in the immediate next year and want to top up your RRSP, thus, saving more tax on your RRSP deduction.
- The interest on your RRSP loan is low.
- You will be able to get a higher return on your investment by putting in a lump-sum amount in RRSP than investing small amounts throughout the year.
- You are planning to use the refund on your taxes to repay a debt or contribute to RRSP.
Make wise use of your tax refund
Your tax refund is your own money coming back to you.
Paying down debt should be the first priority. When debt is handled, consider putting that money in your RRSP contribution.
And finally, know the RRSP limits and the deadline
The RRSP limit for 2020 is $27,830. The deadline is March 1, 2021. Keep these numbers in mind before going ahead with your plan.