2020 RRSP Contribution Deadline is Approaching

RRSP Contribution Deadline is Approaching

Now that the deadline to contribute to your Registered Retirement Savings Plan (RRSP) for the 2019 year is quickly approaching, it is time to review exactly how an RRSP works, some lesser-known facts about them, and ways that you can maximize the benefits associated with them.

What is an RRSP?
 
In 1957, the government of Canada introduced RRSPs as a way to help Canadians invest and save for retirement.  The money in an individual’s RRSP account will provide them with income during retirement. The RRSP contribution limit for the 2019 year is 18% of the income you earned and reported on your tax return in the previous year, up to a maximum of $26,500. The deadline to contribute to your RRSP and lower your taxes for the 2019 year is March 2, 2020. Any contribution that is made after this date will be recorded on the following year’s tax return.
 
While an RRSP’s main function is to incentivize retirement saving by providing you with various tax advantages, the plan also has numerous other benefits that help fund other important life events, such as buying your first home or paying for post-secondary education. This article will delve into some of the ways that RRSPs benefits last throughout your lifetime.
 
By investing in an RRSP, you’re not only seeing the immediate benefits as your contributions reduce your taxable income, but you are also allowing that money to grow quicker in a tax-sheltered account. Investing in your RRSP is investing in your future self.
 
 
What are the main benefits of an RRSP?
 
One of the most notable benefits of an RRSP are the tax savings that you immediately experience when you contribute to the account. By making a contribution to your RRSP, your taxable income in that given year is reduced, meaning you will have a lower tax bill and may even qualify for a lower marginal tax rate.
 
The income that you receive by withdrawing from your RRSP in retirement is subject to taxation. It is assumed, however, that you will be earning less money in your retirement years, thus you will fall into a lower income tax bracket and have to pay lower taxes.
 
Another advantage of having an RRSP is that if offers you the opportunity for your investments to sit and grow, tax-sheltered. This means that the total value of your contributions and earned investment income can grow more quickly.
 
RRSPs also offer you the ability to save for retirement without having to forego planning for other important life events. For example, the Home Buyer’s Plan (HBP) and Lifelong Learn Plan (LLP) allow you to use the money in your RRSP to fund the purchase of your first home and post-secondary education, respectively. Let’s take a closer look at these two plans.
 
Home Buyer’s Plan
 
When withdrawing money from your RRSP, funds are typically treated as taxable income. This isn’t the case with the Home Buyer’s Plan. As of March 2019, the HBP allows first-time home buyers to withdraw up to $35,000 tax-free from their RRSP to put towards the purchase of a qualifying home for yourself or for a related person with a disability. The funds that you withdrew tax-free through the HBP must be repaid within a 15-year period. Any amount not repaid will be included in your income and taxed accordingly.
 
There are various eligibility requirements that you must satisfy to qualify for the HBP. You must be a first-time home buyer purchasing your principal place of residence, rather than a vacation home or property intended to earn rental income. You must have a formal written agreement to purchase the home (or build a qualifying home), rather than just a loan agreement from the bank. The withdrawal from your RRSP has to be made within 30 days before or after you own the house. For a more detailed list of eligibility requirements, check out this CRA website.
 
Lifelong Learning Plan
 
Similar to the Home Buyer’s Plan, the Lifelong Learning Plan (LLP) allows you to withdraw funds tax-free from your RRSP to finance you or your spouse’s post-secondary education. You cannot use funds withdrawn through the LLP to finance your child’s education. The LLP allows you to borrow up to $20,000 from your RRSP (maximum of $10,000 in a calendar year). If you exceed this $20,000 LLP limit, you will have to include any additional amount as taxable income for the year of withdrawal and pay tax on it.
 
Similar to the HBP, the LLP essentially acts as a loan you take out from yourself. As with anyone loan, you must pay back the funds you that you withdraw. For the LLP, the full amount you withdraw must be repaid within a 10-year period. Any funds that aren’t repaid to your RRSP will be included as income and subject to taxation.
 
These two programs available through your RRSP, is the government’s way of incentivizing individuals to simultaneously save for retirement and other important life events that also demand substantial levels of resources.
 
 
Withdrawing from your RRSP
 
You can make contributions to your RRSP until the year you turn 71 years old. When it comes time to withdraw from your RRSP, you have three options: make a cash withdrawal of the funds, purchase a registered life annuity to create a monthly income stream, or convert your RRSP to a Registered Retirement Income Fund (RRIF). The most common option that is selected by investors is to convert your RRSP to a RRIF as this account provides you will an annual income stream but gives you greater flexibility than the life annuity options, in regards to the timing and amount of withdrawals. This article focuses on RRSP contributions, but if you are interested in learning more about RRIF’s and RRSP maturity options, please check out our other article.
 
 
When should you contribute to your RRSP?
 
The easy answer to this question is that it is always a good idea to contribute to your RRSP. If you commit to making regular contributions to your RRSP, you have the opportunity to earn up to 55 years of tax-free compound growth.
 
It makes the most sense to contribute to your RRSP and claim your RRSP deduction when you are earning more than you expect to be at the point you begin withdrawing funds from your RRSP. The percentage that you save depends on your marginal tax rate at the point of contribution and the point of withdrawal.  It is worthwhile to note that you need to consider all income that you will be receiving at the point of withdrawal, not just the income that you are receiving from your RRSP. Other sources of income in retirement that can increase your overall taxable income may include payments from government and employer pension programs.
 
It is especially beneficial to make regular and sizable contributions to your RRSP when you are self-employed or have a very minimal employer pension plan. In this case, you may be missing out on a large retirement income source, so it is necessary to ensure that you remain diligent in guaranteeing you and your finances are sufficient enough to last throughout your retirement years.
 
 
Additional considerations when making an RRSP contribution
 
With the deadline to make RRSP contributions for the 2019 tax year quickly approaching, now is the time to think about your yearly contribution. Essentially, in order to make decisions regarding the timing and amount of your yearly RRSP contribution, it is important to look holistically at your financial situation and your total taxable income for the year.
 
Defer the deduction. Typically, when people make a contribution to their RRSP, they will us their tax deduction immediately. It may be worthwhile to consider saving this tax deduction for a future year, however. For example, if you are expected a significant windfall (large bonus, severance allowance, etc.) at the end of next year that will increase your taxable income and may even possibly push you into a higher tax-bracket, waiting until next year to claim your deduction may be more tax-efficient.
 
 
Conclusion
 
If you find that the RRSP deadline has snuck up on you this year, you are not alone. It is not uncommon for people to lose out on the tax-savings associated with making RRSP contributions because they simply fail to meet the contribution deadline. One way to lessen the chance of this happening is to factor your RRSP contribution into your monthly budget and set up automated payments that make regular contributions to your RRSP.
 
In conclusion, your decision to invest in an RRSP is a highly personal one that will look different for everyone depending on your unique financial situation, current needs, and future goals. Even if your finances are in a pinch, currently, the inherent value of saving for your future self should not be overlooked. Contributing to your RRSP allows your savings to accumulate in a tax-sheltered account, reduce your taxable income in a given year, and provide you with financing options for purchasing a home or pursuing post-secondary education. Investing in your RRSP ultimately reduces the chance of you experiencing cash flow shortfalls in your retirement. Given the obvious benefits of RRSPs, it is no wonder why they have become a cornerstone of investment portfolios for many Canadians. If you have any additional questions, don’t hesitate to reach out to any of the knowledgeable team members at the Bongard Wealth Advisory Group – we’re here to help.