RRSP Guide for Busy Professionals

A Quick RRSP Guide for Busy Professionals

Deadline Day Is Approaching
For many busy professionals, RRSP deadlines often can sneak up on you. The last day for Registered Retirement Savings Plan (RRSP) contributions for 2018 is March 1, 2019, and any contributions after March 1st will be deductible on your 2019 tax return.

What is an RRSP?

An RRSP is a registered savings account created by the Canadian government to encourage Canadian’s to save money for retirement. An RRSP is designed to provide cash flow during retirement in substitute to a defined benefit pension plan. 

Benefits of RRSP Contributions

One of the main advantages of an RRSP is that contributions occur on a pre-tax basis. As such, the government provides you with a tax incentive that reduces your taxable income and gives you a benefit when you file your taxes in April. When funds are withdrawn from an RRSP or a Registered Retirement Income Fund (RRIF) in retirement, the funds as taxed as income at theoretically a lower tax rate than when you were working.

While RRSPs are designed to be long term investment vehicles, other benefits can allow you to access the funds such as the RRSP Homebuyers Plan and the Life Long Learning Plan. The RRSP Homebuyers plan is commonly used by investors when they are purchasing their first house as it allows you to withdraw $25,000 to use toward your down payment. To learn more about the RRSP Homebuyer’s Plan, read our blog post on the topic here.

Finally, another benefit of RRSPs is that you can open a spousal RRSP and make a spousal RRSP contribution. This can be extremely beneficial if one spouse earns more than the other as it allows the higher earning spouse to contribute to their spouse’s RRSP while still receiving a tax break on their tax return. This can make a significant difference in retirement as it allows for better income splitting in retirement. 

How Much Can I Contribute?

Since RRSPs are savings accounts that are registered with the Government, there are annual limits that determine how much you can contribute to the Account. For 2018, that maximum that can be contributed to an RRSP is the lesser of 18% of your previous year’s earned income or $26,230, plus any unused contribution room, less any pension plan contributions or adjustments.

One primary consideration for incorporated professionals is how you pay yourself. If you have incorporated and paid yourself a salary, then you have created “Earned Income,” but if you have paid yourself dividends, they do not count as earned income and will not create contribution room. How you compensate yourself in your practice can have a substantial impact on your retirement and is something that should be discussed with your accountant and advisors.

Your notice of assessment from your 2017 tax return will have your exact contribution limit. This information is also available with your accountant or on the CRA’s online Quick Access portal.

It is quite common for the RRSP deadline to sneak up on busy professionals. Between juggling career, family, other financial commitments and the rest of what life throws at us, RRSP contributions can be lost in the shuffle. One way to reduce contribution pains is to set up monthly recurring RRSP contributions and to factor it into your monthly budget. Another smart strategy is to pay yourself forward by using your tax return in 2019 from your 2018 RRSP contribution, to contribute for your 2019 RRSP contribution. By using these strategies, this can help to reduce any cash flow shortfalls.

To learn more about RRSPs, check out our blog post on RRSPs and TFSAs here.