With the March 1st deadline around the corner, it’s a good time to revisit your overall financial plan to determine if you should be making an RRSP contribution for the 2021 tax year.
A Primer
A Registered Retirement Savings Plan (RRSP) can hold a variety of investments like mutual funds, ETFs, GICs, bonds and stocks.
When you “register”, you effectively enter into an agreement with the government; in exchange for putting money away for retirement, you get the following benefits:
- You reduce your taxable income by the amount of your contribution (known as a tax deduction)
- You can defer tax on any investment gains you make within the RRSP, as long as the money stays in your account. In effect, you are growing money tax-free.
- You are taxed when the money is withdrawn from the account (this is a benefit if you have less taxable income when withdrawing)
Investors can contribute to their RRSP up until December 31 of the year they turn 71. They must then convert it to another vehicle, typically a Registered Retirement Income Fund (RRIF), from which they can make withdrawals.
In 2022, the total amount that can be contributed to an RRSP is the lesser of $29,210 or 18% of your 2021 earned income. Importantly, you can carry forward any unused contribution room from previous years. The deadline for contributing for 2021 is March 1st, 2022.
You do not have to use the tax deduction in the tax year in which you make the contribution to your RRSP. You can defer the tax deduction to some point in the future (ideally when you are earning a higher income to maximize the benefit of the tax deduction).
RRSP vs. TFSA
There is, of course, another registered account alternative. The Tax-Free Savings Account (TFSA) is also designed to help people save for retirement. We will expand on the TFSA in a future article but wanted to make a couple of points about the differences between two retirement accounts.
Perhaps the biggest difference is that you do not reduce your taxable income by contributing to a TFSA. While you do not receive a reduction in your taxable income when you make a contribution, your account does benefit from tax-sheltered growth over the lifetime of the account and withdrawals are not taxed.
Another difference between the RRSP and TFSA relates to requirements for withdrawals – there is currently no age limit in which you are required to make withdrawals from a TFSA. With an RRSP, the deadline to convert your RRSP to a RRIF is the end of the year you turn 71 and you must make your first withdrawal from your RRIF in the year you turn 72.
The same variety of investments can be held in a TFSA as an RRSP account – mutual funds, ETFs, GICs, bonds and stocks.
If you have not yet contributed to your TFSA, there is no need to worry. Every Canadian, 18 years of age and older, has been accumulating room since 2009 whether they have made contributions or not.
Conclusion
RRSPs are still a relevant tool a Canadian’s financial toolkit. Whether you should be contributing to an RRSP, a TFSA, or both – depends on your specific circumstances. What to invest in within your RRSP (or TFSA) depends on your specific risk tolerance and goals for retirement. If you would like to discuss whether an RRSP contribution prior to the deadline is the right decision for you, please reach out ASAP.
