Why Maximizing Your RRSP is a Smart Choice

With just over a month until the March 1^st, 2019 RRSP deadline one of the most frequently asked questions we get asked is about Registered Retirement Savings Plans (RRSP) and whether it makes sense to contribute to an RRSP, and why.

From the taxation side, as tax experts, we have all the answers, but from an investment side, we wanted to provide the same level of expertise, so we asked our friends at Wealthsimple to help fill in the blanks.

What is an RRSP?

A registered retirement savings plan (RRSP) is an account designed to help Canadians save for retirement. The money in an RRSP can be used to buy a whole host of investments—mutual funds, ETFs, stocks, bonds, and the like. While the investments are held in your RRSP, you won’t have to pay tax on any interest, dividends, or capital gains you earn.

How much can I contribute?

Because RRSPs are registered accounts, they’re subject to certain rules. One of the rules is that there’s a limited amount of money you can contribute in any given year. The contribution limit changes year to year, but for 2018, the maximum you can contribute is 18% of your income or $26,230, whichever is lower.

If I do not contribute one year, can I contribute the next year for both years?

Yes! You can catch up if you didn’t max out your contributions in earlier years. To find out how much you can contribute, check out the Notice of Assessment that you got after filing your taxes last year.

Where can I find how much space I have to contribute to my RRSP?

Your contribution room is the amount stated in your 2017 Notice of Assessment plus your 2018 contribution room, minus any deposits you’ve made this year. It can be hard to keep track of, so Wealthsimple built a simple, sophisticated RRSP tracker that does the work for you.

We’ll let you know if you’re on track, we’ll warn you if you’re in danger of over contributing (the CRA will penalize you if you do) — we’ll even calculate how much room you’ll have left after your scheduled auto-deposits.

So what are the pros to investing in an RRSP?

The money you contribute to your RRSP is what’s called “pre-tax.” That means that you can subtract the amount you contribute from your income and pay less in income taxes. If you made $60,000 and you contributed $5,000 to your RRSP, you will pay tax on only $55,000 of income. You will eventually have to pay taxes when you withdraw your money, but the idea is that when you do so, you’ll be retired and your tax rate will be lower.

While the government charges a hefty tax penalty to withdraw funds early (10% to 30% immediately but possibly adjusted when you file your taxes), they do make exceptions if you’re using it to buy a first home or go back to school, as long as you put the money back within 10 years for education loans and 15 years for home purchases.

Is there ever any tax to be paid on an RRSP?

Yes, you will pay tax on your withdrawals. The biggest pitfall is forgetting, when doing your retirement planning, that you will have to pay taxes on your withdrawals. Also, the government requires you to close your RRSP by the end of the year you turn 71 and use the money to buy a registered retirement income fund (RRIF) or an annuity.