Should you contribute to your RRSP this year?
Updated: Aug 21, 2020
It’s that time of the year again! RRSP season is here and March 2nd is the last day that you can contribute to reduce your 2019 taxes. But, should you?Here are some compelling reasons why you may want to contribute.
You get a tax deduction when you put money in your RRSP. The amount of tax you save will depend on your marginal tax rate. Once inside the tax-sheltered environment, investments grow faster than they would outside an RRSP where there would be annual tax on gains or income from the investments.The money that would have gone totax payments can remain in the account and be invested.
You can use your RRSP to help buy your first home.The Home Buyers Plan (HBP) allows you to withdraw up to $35,000 from your RRSP to use for the down-payment on a qualifying home without paying tax. There is no tax on the withdrawals if the funds are repaid in equal installments over 15 years.
The Lifelong Learning Plan (LLP) allows you to withdraw up to $20,000 total ($10,000 per calendar year) from your RRSP to finance training or education for you or your spouse(not your children).Typically, each year you must repay 1/10 of the total amount you withdrew until the full amount is repaid.
You can claim your deduction when you need it most as the tax deduction for your contribution can be carried forward indefinitely. If your taxable income is low, you may want to consider deferring your deduction to a year in which your income and tax rate are higher in order to maximize your overall tax savings.
RRSP income can be important even if you have a pension. Very few employer sponsored pension plans are designed to provide all the retirement income you will need, so saving on your own through an RRSP can be beneficial. For example, let’s assume your pension planat work provides 40 per cent of your needed retirement income, even with government programs such as the Canada Pension Plan and Old Age Security there still could be a gap between what you desire in retirement and what you will receive. That is where saving through your RRSP can be so important and can determine the lifestyle you will have in your golden years.
When you start withdrawing money from your RRSP/RRIF you will most likely be in a lower tax bracket. If you are currently in a 50% tax bracket you would receive a refund of $500 for a $1000 contribution, while, in retirement, with potentially lower income, if you were in a 30% tax bracket, you would only pay $300 in tax when you withdraw the funds. A savings of $200 in tax.
While there are many good reasons to contribute to your RRSP, there are situations where it is not advisable to do so:
If the purpose of your investment is something other than retirement or you are not planning on using the money for the purchase of your first home via the HBP or to finance training and education via the LLP.
If you expect your income to remain low throughout your working years, it may make more sense to contribute to a Tax-Free Savings Account (TFSA) before considering an RRSP.
There is still time before the deadline. Discuss with your advisor if a contribution to your RRSP makes sense for you.
This writing is for general information purposes only and should not be considered to be legal, accounting, tax or personalized financial advice. Any opinions expressed are those of the author and may not necessarily reflect those of Louisbourg Investments Inc.
Scott Lewis is a Portfolio Manager and Wealth Advisor with Louisbourg Investments. Comments or questions may be submitted to Scott at firstname.lastname@example.org, or he may be reached at 855-1155.
Follow him on Twitter at @AdvisorScott.