What You Need to Know About the Looming RRSP Deadline
We’ve got answers to your RRSP questions.
Q 1. The RRSP deadline is looming and you might be feeling pressured to contribute, but is it always the right choice for everyone?
Not necessarily. If you simply can’t afford to make an RRSP contribution because you don’t have any money to contribute, than topping up your RRSP this month isn’t right for you – BTW – you have until March 1st, 2017 to make your contributions count for the 2016 tax year.
If, however, you haven’t carried a credit card balance for more than 60 days in the past 12 months, and you don’t have other expensive debts, an RRSP loan could be a good option. That’s where you borrow money specifically to contribute to your RRSP. But, you’ll need to review your budget and ensure that you can pay the RRSP loan back within 12-18 months.
Q 2. Who needs to be seriously looking to making extra contributions this RRSP season?
If you make more than $50,000 annually, than RRSPs are likely your most powerful savings tool for retirement. That’s simply due to your tax rate. But, if you make less than that, you should focus first on saving using your TFSA.
Q 3. How do you decide how much you need to be contributing for your RRSP? For many of us those contribution limits are rather lofty goals?
You’ll want to review your available RRSP contribution room. That number can be found on your Notice of Assessment from Canada Revenue Agency. If you’ve lost that document, you’ll want to sign up for My Account to gain access to your limits.
Remember that these RRSP limits carry forward indefinitely so if you don’t contribute, the available limit will grow and grow. If you’ve got a high limit, we recommend catching up over a 5-year time horizon.
Q 4. What role might a TFSA play in your decision making?
A TFSA is also a great tool for saving because you grow your money tax free and you can take it out at any time. If you want both RRSP and TFSA, follow the 2/3 RRSP 1/3 TFSA rule. That’s where 2/3 of your money that’s allocated for long-term savings goes into your RRSP and 1/3 goes into your TFSA.
Q 5. What about leveraging through RRSP loans? What does it mean and what role could it play?
Leveraging through an RRSP loan allows you to catch up on your RRSP contribution room. AND, it significantly reduces the taxes you pay, often through a sizeable tax refund. HINT – this refund should be applied directly onto your RRSP loan.
Here’s an example, let’s say you borrow $10,000 to maximize your RRSP contribution room at age 30. That $10,000 compounded at 9 per cent for 25 years adds up to $86,000 before tax when you’re 55. Meanwhile, your $10,000 RRSP loan at 6 per cent interest, paid off over 12 months, would cost you less than $350 in interest. So, the gains on your RRSP investments outweigh the costs of the loan.
Q 6. How much money will a person get back on their taxes through an RRSP contribution?
Everyone’s tax bracket and financial situation is unique. So, you’ll need to review the specifics with your tax advisor or accountant. But, generally speaking, a $1 contribution results in approximately $0.30 in saved taxes.
Q 7. Bottom line, how do you keep from feeling overwhelmed by that looming deadline and look at your RRSP plans in a reasonable way?
Follow these steps:
- Determine if you can afford to contribute (Hint – you need to have a budget so download our tool from last month’s newsletter).
- Make regular contributions throughout the year so that you aren’t “behind” when February hits and it’s RRSP season.
- Remember that growing your money is a long-term gig so don’t feel pressure to catch up all at once. Take the next 3-5 years.
- Get some quality advice from a Money Coach or retirement planner. You’ll need these professionals to help you put your RRSP savings to work.
Upcoming Event – RRSP webinar for FREE
Join us on Wednesday February 15, 2017 at 8pm EST for our FREE MeVest RRSP Webinar. It’s only 45 minutes of your life! Space is limited. CLICK HERE to save your seat.