RRSP facts on contribution deadline day
ANALYSIS: Those who have already made their RRSP contribution on this last day of the 2015 RRSP season likely think the deadline can’t come soon enough. Having said that, there will be some who wait to the last minute to do their contribution and they have until midnight tonight. So here are the facts if you are sitting on the fence and wondering it if is right for you.
The maximum contribution for the 2015 taxation year is 18% of your income or $24,930, whichever is less, and that amount goes up in 2016 to $25,370.
You’ll find your personal maximum allowable contribution on your most recent notice of assessment from the Canada Revenue Agency (on line A of the RRSP Deduction Limit Statement).
You can carry forward unused contribution room from prior years. In fact, you can use your unused contribution room in a single year or over a number of years until the end of the year in which you reach age 71 (or the end of the year your spouse/common-law partner turns 71).
Why even consider an RRSP? Because RRSPs provide tax-saving, tax-deferring, income-splitting strategies. But they aren’t for everyone. If you are low income earner and struggling to save I would recommend you save outside the RRSP and consider a TFSA – Tax Free Savings Account. The last thing you would want is to have your government benefits compromised due to a small amount accumulated in your RRSP.
A few tips to build your retirement savings by way of the RRSP:
1) Maximize this year’s RRSP contribution: This is the best strategy for tax savings and maximizing potential long-term growth.
2) Maximize last year’s RRSP contribution: For additional tax savings and enhanced long-term growth, catch up on your unused contribution room as quickly as possible.
3) Borrow to gain: You could maximize this year’s contribution or catch up on past contribution room with an RRSP loan. The money you borrow will generate a tax break and add to your tax-deferred RRSP growth potential. The key is to get a loan at a low interest rate and pay it back quickly. Use your extra tax savings to help pay off the loan.
4) Split to gain: If your spouse’s income will be lower than yours over the next few years or in retirement, a spousal RRSP can generate retirement income that is subject to less tax. The plan is in your spouse’s name but you contribute to it. Your total can’t exceed your personal yearly contribution room but your spouse’s limit is unaffected by your contribution. Plus if your spouse is younger than you the benefit of a longer period were taxes are deferred means more money in your pocket.
5) The money you contribute to your RRSP is what’s called “pre-tax.” That means that you can subtract the amount you contribute from your income and pay less in income taxes. If you made $60,000 and you contributed $5,000 to your RRSP, you will pay tax on only $55,000 of income. You will eventually have to pay taxes when you withdraw your money, but the idea is that when you do so, you’ll be retired and your tax rate will be lower.
While the government charges a hefty tax penalty to withdraw funds early (10% to 30%), they do make exceptions if you’re using it to buy a house or go back to school, as long as you put the money back within 10 years for education loans and 15 years for home purchases. If you don’t pay it back be careful because the amount you owe on a yearly basis gets taken into taxable income for the year.
RRSPs aren’t for everyone but everyone should at least explore the plan to see if is for them.
As the Chief Financial Commentator for CTV News, Pattie Lovett-Reid gives viewers an informed opinion of the Canadian financial climate. Follow her on Twitter @PattieCTV