If you want to lower your 2018 tax bill and have more money in your pocket, you should consider making an RRSP contribution.
Here are some tips to help you get the most out of your money this RRSP season.
The RRSP contribution deadline is March 1, 2019, which means that you can make (and declare) a contribution for the 2018 tax year up until that date. Doing so will lower your 2018 tax burden.
When it comes to timing, you should also consider that every year you earn employment income, you generate room for the following tax year. For example, assuming you have no previous carry-over, you can contribute 18% of your 2017 income, to a maximum of $26,230 for the 2018 tax year.
Know how much you can contribute
One of the most important variables to understand is your available contribution room.
To better understand how much you can contribute, let's break down this sample RRSP deduction limit statement. You can find this information on your most recent notice of assessment from the CRA, or online if you have a my CRA account.
In this example, the individual had an RRSP deduction limit of $45,870 at the end of their 2017 tax year. In this case, think of the 2017 deduction limit as contribution room that has been carried forward from previous years.
They also earned income in 2017 which allowed them to increase their 2018 contribution room by the maximum amount of $26,230.
This individual likely participated in an employer Defined Contribution Pension Plan or Defined Benefit Pension Plan in 2017, which creates a pension adjustment. This pension adjustment takes away available contribution room, as money that goes into pension plans is treated somewhat similar to RRSP contributions.
Once this individual's 2018 contribution room, previous deduction limit, and pension adjustment are all factored in, they can contribute up to $62,913 for the 2018 tax year. This number may seem high, but the majority of Canadians have large RRSP room as they don't max out their contributions every year.
Automate your contributions
It can be hard to save up enough money to make a lump-sum RRSP contribution once a year. Although the start of a new year is often called RRSP season, you can contribute to your RRSP at anytime throughout the year. The easiest way to do this is to set up automatic monthly contributions from your bank to your RRSP provider.
Invest within your RRSP!
Just holding cash in your RRSP ensures that inflation will decrease your future buying power and you will miss out on years of tax-free investment growth.
Whether your investment approach is conservative or aggressive, it still makes sense to put your money to work in some form so that you capitalize on the tax-free advantage of RRSPs.
Be smart with your refund
If you are fortunate enough to get a tax refund due to a sizable RRSP contribution, try not to spend it all as free money. Remember, this was originally your earned money that you are simply getting back through an incentive that the government set up to encourage long-term saving.
It's generally recommended that you reinvest most of your refund or use it to pay down debt. Remember, when you take money out of your RRSP (usually in retirement) you’re going to pay tax on your withdrawals. By reinvesting your tax refund every year, you are essentially prepaying those future taxes.
Talk to an expert
Contributing to an RRSP makes financial sense for most Canadians earning over $50,000 per year. There are debates on contributing to TFSAs versus RRSPs, however, as is often the case with personal finances, it really depends on your situation. There are other elements to consider, like what types of investments should you hold in your RRSP from a tax perspective, maximizing employer group RRSPs, and when to utilize a spousal RRSP. At Frame, our planning experts can develop a customized contribution and investment strategy so that you can reach your long-term goals.
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