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Jim Laszlo, RRC®
Jim Laszlo, RRC®
Financial Planner

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Personal Wealth and Finance

Two strategic ways to contribute to your RRSP

October 1, 2019

The Canadian government regulates the Registered Retirement Savings Plan (RRSP) program, allowing it to have special tax benefits as you save for your retirement. Annual RRSP contributions can reduce the amount of income tax you pay in the year of your contribution. These monies invested annually grow on a tax-deferred basis, and tax is only paid at the time of withdrawal. There are two ways that you can contribute to your RRSP.

Monthly Contributions The alternative is to invest on a monthly basis using dollar-cost averaging. You can always top up your RRSP contribution (up to the allowable limit), just prior to the deadline year by year.

Lump-Sum Contributions Many people invest in their RRSP by purchasing a lump sum investment prior to the annual deadline. As noted you can also top up your annual contributions up to the maximum allowed contribution before the annual deadline.

You may pay less tax on your income An RRSP can be deducted from your taxable income allowing you to pay less tax on the money you make, which can leave you more money to invest for retirement. After you contribute to an RRSP, you can claim an equivalent deduction from taxes you owe to Canada Revenue Agency (CRA). Many people use the tax saved to make an RRSP contribution for next year or pay off after-tax debt such as credit cards.

Your investments grow tax-free Your RRSP investments accumulate within the plan tax-free, as do any addition to your contributions, including capital gains, interest, and dividends or distributions paid out on an investment fund. The longer your money stays sheltered from the taxman, the greater the tax-free accumulative earning power of your investment. However, taxation occurs once income is withdrawn from your RRSP.

How Much can you contribute to your RRSP? To find out the amount of your RRSP contribution that you are allowed to deduct for your income taxes, check Last Year’s Deduction Limit Statement on your latest Notice of Assessment or Notice of Reassessment.

Note: Canada Revenue Agency (CRA) establishes guidelines for the minimum and maximum overall yearly amount a person is eligible to contribute to their RRSP. The basic formula used to determine a taxpayer’s eligible contribution is as follows: 18% of earned income minus any Pension Adjustment = eligible contribution amount.

Who can contribute to an RRSP? All Canadian taxpayers with “earned income” in the previous tax year, or those having unused contributions carried forward from previous years can contribute to their RRSP. A person is eligible to make contributions to their RRSP until December 31 in the year they reach age 71, provided that they have contribution room.

The deadline for contributions In order for your RRSP contributions to be eligible for the previous years’ tax filing, you must make your contributions within the first 60 days of the current year. The Income Tax Act sets the deadline as “on or before the day that is 60 days after the end of the year”, which is March 1st except in a leap year when it will be February 29th.

 

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