Your RRSP Season Simplified
What you need to know ahead of the March 1st contribution deadline.
Countless Canadians open a registered retirement savings plan (RRSP) to save for their future. However, that’s not the only benefit of an RRSP. With the 2020 RRSP contribution deadline coming up on March 1, 2021, many are looking to contribute extra money as a way to reduce taxes payable or increase the tax refund they are eligible to receive.
Are you ready for RRSP season? If so, congratulations on making a smart choice to save for retirement. If not, don’t fret – you still have time. We put together the ABCs of RRSPs so you can feel confident in your investments now and in the future.
Now, let’s review what you need to know!
What is an RRSP? And why should I have one?
First and foremost, a registered retirement savings plan is a personal savings account that allows Canadians to save for retirement. A RRSP can hold a variety of investments, including stocks, bonds, mutual funds, and more.
It is an impactful savings tool due to its tax advantages. Any contributions made within your RRSP are tax deductible meaning any money that you put into your RRSP, up to a certain limit every year, can reduce your annual taxable income. Your RRSP contributions are also tax deferred. The taxes on any investment growth are differed until withdrawn. Most Canadians wait until retirement to take any money out. At retirement, you will likely be in a lower tax bracket and therefore reduce the tax rate on your RRSP withdrawals.
How much can I contribute to my RRSP?
For 2020, you can contribute an amount equal to 18% of prior year income or $27,230, whichever is lower. But pay attention to the next three questions as they may impact your RRSP contribution room.
What if I haven’t contributed the maximum limit in previous years?
If you haven’t contributed the maximum limit in previous years, you can carry forward the unused RRSP contribution room to the current year. For example, if you earn $50,000 in 2019, you can contribute an amount equal to $9,000 plus any unused room from previous years.
How does my employer plan impact my RRSP room?
If you are part of a group retirement program where your employer matches, those monies will reduce the amount of eligible room you can contribute. If the program is a Pension (DCPP) or Deferred Profit Sharing Plan (DPSP), the amount contributed by your employer will show up on your T4 as a ‘pension adjustment’ and reduces your RRSP room the following year.
If the program you participate in is a Group RRSP, the monies that are contributed by your employer will reduce the RRSP room in the same year. You will need to ensure that the monies that are being contributed by yourself and work stay within your individual RRSP limit.
How can I find out my RRSP contribution room?
To find out your eligible 2021 RRSP contribution room, you can review your notice of assessment sent to you by the CRA last year or visit, My Service Canada Account.
How much will this reduce my taxes or increase my refund?
Your RRSP contributions will reduce your taxes payable or increase your refund based on the tax bracket. For example, if you lived in Ontario, had an income of $50,000 contributed $2,500 to your RRSP, you would reduce your taxes payable or increase your tax refund in the amount of $685. It is important to be aware that your tax savings will be based on your income, tax bracket, how much you contribute, and where you live.
Should I wait to contribute until the RRSP deadline each year?
Although you can make a lump sum contribution during RRSP season, there is a more effective way to contribute. Smaller, more regular contributions can provide you with the same tax benefits, but your investments can grow faster in the long run.
Making regular, monthly contributions through payroll deductions can lower the tax deducted from each paycheque. Rather than receiving a large tax refund, you reduce your taxes year-round.
Contributing to your RRSP monthly allows you to take advantage of dollar cost averaging and to minimize market fluctuations. You also gain the benefits of tax-deferred investment growth, letting your savings increase more rapidly as the investments have a longer time to grow in value.
Lastly…
If you like the idea of having your employees continue this mindset year-round, reach out and say hello! We can provide tailored education sessions for your teams – this way, you’re not having a last-minute impact come RRSP season.