RRSP’s – the ins and outs and what you need to know!

The last month to make RRSP contributions to be claimed for 2019 tax filing is upon us. Time to check those couch cushions, and winter coat pockets and scrounge up some savings, to make that all-important contribution!

What are RRSP’S?

Registered Retirement Savings Plan, a plan created by the federal government to allow you to save and invest your hard-earned dollars into a tax deferred savings account. The term “tax deferred” refers to any money put into the plan that can accumulate tax free until the money is withdrawn.

When can I contribute for the current year?

March 2, 2020 is the contribution deadline for the 2019 tax filing season.

The RRSP contribution period goes from March 2nd of the current year to March 1st of the following year (first 60 days). These dates are important to remember, especially the first 60 days of the following year. These latter contributions can ONLY be declared in the previous years tax return.

Let’s use Peter as an example:

Peter contributes $2,000 to his RRSP on Feb 23rd, 2020. Because the contribution was made in the first 60 days of the year, Peter must declare these on his 2019 tax return. He can choose not to use the contributions and carry them forward to the following year, but he must claim them in the 2019 year.

Can I contribute as much as I want into the plan?

Not exactly. You are limited to the lesser of 18% of your earned income for the year, or the maximum, which is predetermined every year. This year the max sits at $26,500 of contribution room. This amount is what is called your RRSP limit and can be found on your Notice of Assessment from the CRA, or your My Account. All unused room from previous years, accumulates to future years.

The government stipulates *earned income* as not all sources of income are included; including but not limited to interest income, dividends and capital gains.

What makes RRSPs enticing to the average taxpayer is, that not only does your money grow without any interference from the tax man, but you get a tax deduction each year you contribute. Any and all amounts, including the first 60 days of the current year get deducted from your total income, which helps determine your NET income. That’s an almost instant return on investment even before your money has had time to work for you.

Let’s use Peter again as an example:

Peter made $46,000 during the year. He had $3,000 of disposable income and decided to contribute his money to his RRSP. At $46,000 earned income Peter falls into the 15% federal income tax bracket. The $3,000 acts as a deduction from income, bringing his net to $46,000. Peter just maximized his RRSP deduction, by bringing him down a federal income tax bracket!
Let’s take a look at a simple calculation.
Without RRSP $46,000 x 15% =$6900 tax payable.
With RRSP Contribution $46,000 – $3,000 = $43,000 x 15% $6450 tax payable.

The tax savings alone are huge for Peter, and he was pleased with his decision to contribute. Most places of employment take enough tax off your salary or hourly wages to match your year income according to your tax bracket. So, in theory Peter receives a $450 refund from the CRA for his contribution, this does not take into account any and all other forms of income deductions, as well as the provincial tax calculation.

Now another thing to consider is lowering your net income can potentially increase your government credits, like GST/HST and the Canada Child Benefit. These are all calculated based on net income!

As tax preparers, we recommend RRSP contributions as they can provide a huge return on investment to the taxpayer.

The benefits of an RRSP do have an expiry date. Unfortunately, at age 71 is when the CRA requires you to start withdrawing from your RRSP at set percentages. This money being withdrawn is now a RRIF. The whole point of RRSP contributions, aside from ensuring you can live comfortably upon retirement, but it defers the taxes paid on this money, when you likely have lower earned income and be taxed in the lowest tax bracket.

One last thing to note, if you do have RRSP saved up and are a first-time home buyer you can withdraw up to $35,000 for the down payment on your home and have that withdraw be tax free. Repayment is over a 15-year time span, and first payment is required in the second year after the withdrawal. If the money is not contributed back in each tax filing year, it will simply be added as other income. Typically, any money withdrawn from your RRSP is subject to income tax for any other reason outside the Home Buyers Plan and the Lifelong Learning plan, which similarly is the opportunity to withdraw up to $10,000 in a calendar year, ($20,000 lifetime) for education opportunities, with a similar repayment plan.

Now is the time to determine if you should make that last RRSP contribution for the year.

Have questions or want some advice for this upcoming tax filing season, we at SheDo Tax are more than happy to help!

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