The RRSP contribution deadline is coming.
Tomorrow – March 1, 2017 – to be exact. But what does that mean? Should you contribute? How much? And what exactly is an RRSP anyway?
So many questions, so little time. Don’t worry, I got you.
Have 5 seconds? Here’s my take on what you really need to know:
What is an RRSP?
It’s a special type of bank account that helps you save for retirement. It’s not an investment, it’s where you put your investments.
What does it do?
RRSPs allow you to defer tax to the future, and grow your investments tax-free.
What’s the benefit?
It’s all about your tax rate. If you’re earning more / in a higher tax bracket today than you are in retirement, you’ll ultimately pay less tax by deferring it.
Why do I need to contribute before the deadline tomorrow?
You’ll be able to include your contribution in your 2016 tax return and get your refund this year. After the deadline you’ll have to wait until you file in 2017.
Should I be contributing to one?
If you expect your tax rate to be lower in the future (retirement) than it is today, then the math says yes. And if you are saving for a down payment, you should also consider contributing – you can use the tax refund to boost your down payment.
How much should I contribute?
As much as you reasonably can, up to the limit. Check your Notice of Assessment from last year’s tax return to figure out what that is.
Have 5 minutes? Here’s what else you should know:
Is my money locked in until retirement?
No. You can withdraw at any time, you’ll just have to pay tax on it.
Two exceptions: there’s no tax consequence if you use the money to make a down payment on a home as a first time buyer (Home Buyers Plan – up to $25K) or to pay for school (Lifelong Learning Plan – up to $20K). These are essentially loans to yourself that you’ll have to pay back over 15 and 10 years, respectively.
Also, you can redirect the cash and investments in your RRSP to different institutions (for example, from a regular bank to an online advisor).
How do I open an account, like, now?
Call your bank. They can do it over the phone.
Do I need select my investments before March 1st too?
No. You just need to contribute the cash. You can figure out how to invest it later. I can help you with that!
What do I do with the tax refund I’m going to receive? I’m thinking Mexico!
Sure, you could splurge on something fun, and spending on experiences is a great idea. But the real power of an RRSP account is that you can use pre-tax dollars to save for the future. The refund you receive is essentially getting back the taxes you paid on that contribution. Ideally, you’ll contribute your refund back into your RRSP and invest it.
Should I borrow to contribute?
Maybe. I did that the first time I contributed and I regretted it because I stressed about having to pay back the debt, which it took me over a year to do. You might be better off contributing smaller amounts each paycheque, starting today. As a rule of thumb you shouldn’t do something for a tax benefit that you wouldn’t do otherwise. Check out this blog for more info on debt vs saving.
Still not sure if RRSPs are right for you? Don’t feel pressured to act right now. I would prefer to see you making savings and investing decisions from a place of confidence.
If you miss the March 1st deadline all is not lost. You can make significant progress towards your financial success by creating an intentional investment plan and contributing to it each month instead of cramming it in at the end of the year.
Want to know more about intentional investing? Send me an email at email@example.com and let’s talk.