3 important dates to put in your personal finance calendar
Jan. 1: TFSA contribution limit extension
Tax-free savings account holders can start the New Year by contributing another $6,000 to their TFSAs. If you withdrew money from your TFSA in 2020, that contribution space can also be reclaimed.
The CRA provides personal individual limits in annual Notice of Assessments (by mail or on the My CRA website) on individual tax returns. However – contribution limits posted by the CRA are usually for the previous year, so be sure to include contributions made in the current year. Check our Money Facts 2021 guide for limit information.
March 1: RRSP contribution deadline
TFSA contributions can be made at any time but there is a March 1 deadline to make your registered retirement savings plan (RRSP) contribution if you want to lower your 2020 tax bill.
The contribution amount can be deducted from your 2020 taxable income. The higher your marginal tax rate, the bigger the tax savings. Keep reading for more information on all things RRSP.
April 30: Income tax deadline
The 2020 tax year will be complicated for many individuals and the CRA due to the pandemic. Our next post will be all about taxes (including what you can write off if you’ve been working from home), so stay tuned!
2021 Guide to RRSPs
Ready for RRSP season? If you haven’t opened an RRSP yet, now is a great time to start and watch your savings bloom. Saving and growing your money in an RRSP will not only boost your retirement income, it can also reduce your tax bill.
What is an RRSP?
A registered retirement savings plan (RRSP) is a personal savings account that has special tax advantages. An RRSP can hold different types of investments – like stocks, bonds and mutual funds. You can contribute to your RRSP up to a certain limit each year. See our Money Facts 2021 guide.
How do RRSPs work?
All your RRSP contributions are tax deductible and tax-deferred. What does that mean?
- Tax-deductible contributions mean you can reduce the amount of your taxable income
- The investments growing in your RRSP are tax-deferred. This means you won’t have to pay taxes on them until you take money out of your RRSP.
What happens if you miss the RRSP deadline?
Not the end of the world, it just means that you’ll have unused RRSP contribution room to carry forward. You will miss the tax deduction for this year, but you can open and contribute to an RRSP at any time of the year as long as you don’t exceed the contribution limit.
Have any other questions about RRSPs?
As always, you can contact us any time! Reach out to a member of your Arbutus Financial team for more information.
When should you start contributing to your RRSP?
For many, contributing to an RRSP is a no-brainer – the sum is deductible from total income, which can reduce taxes in the year it’s claimed. What’s more, income earned in an RRSP, such as interest, dividends and capital gains, grows tax-free until it’s withdrawn. The idea is to contribute to an RRSP earlier in life to benefit from compound growth over time for retirement.
Funds in an RRSP can also be used to buy a home through the Home Buyer’s Plan, or go back to school using the Lifelong Learning Plan.
RRSP or TFSA?
How much and when to contribute to an RRSP is a conundrum for many Canadians, particularly those who need to choose between an RRSP and the tax-free savings account (TFSA). There is no income deduction when you contribute to a TFSA, but the assets inside grow tax-free and are not taxed when withdrawn.
If you can’t contribute to both an RRSP and a TFSA in a given year, generally speaking, Canadians in a higher income bracket should pick an RRSP over a TFSA to take advantage of the deduction today and withdraw at a lower tax rate in retirement.
On the flip side, those earning less money might choose to pay tax on their income now, at lower rates, and contribute the after-tax amount to their TFSA first. They could then contribute to an RRSP later if their income and tax rate is higher. For those unsure about whether the money can remain invested long-term, a TFSA may be better suited for short-term investments.
Of course, there’s no right answer for everyone. It really depends on your tax rate, your financial plan, your goals and what you’re trying to achieve over what time horizon. For information about your personal plan, please get in touch!
RRSP contribution strategies
Canadians can also contribute to an RRSP in one year, and deduct that amount in a future year. This strategy can sometimes work for people in a lower income-tax bracket, who know they will earn more in the future, such as a student just starting their career or someone on maternal or paternal leave.
It may be tempting to borrow money to contribute to an RRSP, but this strategy is not recommended. Unless you can pay back in a year, borrowing for an RRSP is usually not a good idea because the interest isn’t deductible.
Spousal RRSPs are also an option for married or common-law couples. In this case, the higher-income spouse contributes to the spousal RRSP and receives the tax break. The lower income spouse has the RRSP growing in their name. In retirement (or prior), the lower income spouse can withdraw money and pay tax at a potentially lower rate than the contributor.
If you would like to discuss this topic in greater detail or have any questions, please reach out to a member of your Arbutus Financial Team.