How to make the most of your RRSP
The best time to start an RRSP is, well, anytime – but there are lots of advantages for starting one when you’re just entering the workforce. The longer you have to contribute to your RRSP, the more money you’ll set aside for retirement and the greater tax benefits you’ll receive.
If you’re considering starting an RRSP, it’s a good idea to have a solid understanding of how to take advantage of them. We’ve compiled some of the most important details you need to know about RRSPs in order to maximize your earning potential and reach your financial goals.
What is an RRSP?
An RRSP (Registered Retirement Savings Plan) is a type of savings account registered through the federal government. Most financial institutions offer RRSP programs because they’re a popular way to save money due to the tax advantages they offer.
RRSPs are tax-sheltered investments
If you’re trying to decide where to invest your money, an RRSP is a good choice because the interest you earn is tax-sheltered as long as it stays invested in the plan. You won’t pay tax on your RRSP earnings until you withdraw money from your account. If you wait until retirement to withdraw your money, you’ll likely be in a lower tax bracket and won’t pay as much tax on your RRSP earnings.
RRSP income tax deduction
Not only does contributing to your RRSP help you prepare for your financial future, but you also get to take advantage of tax breaks. The Canada Revenue Agency allows you to deduct RRSP contributions from your income, lowering your overall taxable income. To claim your RRSP deduction, enter your contribution on line 20800 of your income tax form. If you have a significant RRSP contribution, it may even help you qualify for a refund, which you can reinvest later on.
Deduction limits and unused deduction room
Your RRSP deduction limit is the maximum amount of RRSP contributions you can deduct from your income at tax time. It’s calculated each year based on your income, pension adjustments and unused deduction room. Your deduction limit can be found on your last Notice of Assessment (NOA) from the Canada Revenue Agency. If you go over your deduction limit, you may have to pay taxes on excess contributions, so it’s important to know what your limit is.
Review your tax statements from last year; if you happen to have unused deduction room, it’s a good opportunity to take advantage of it. Investing into your RRSP when you have room will reduce the amount of taxes you’ll owe come April.
Married or common law? Consider setting up a spousal or common-law partner RRSP
A spousal or common-law RRSP can be beneficial for both partners. Take advantage of this program if one partner earns more than the other; when the higher-income partner contributes to a lower-income partner’s RRSP, the spouse who contributes can take advantage of the income tax deduction. The lower income partner also benefits from this type of RRSP, since they own the investment and it ensures retirement income is more evenly distributed.
Not sure how much to contribute? Try an RRSP calculator
It can be difficult to wrap your head around how much money you should set aside for your RRSP. The reality is, this amount is dependent on several factors – your current income, your age, when you plan on retiring and more. Try an RRSP calculator like this one from Wealthsimple – it can help you estimate a reasonable RRSP contribution based your individual situation.
And the best tip? Make your RRSP contributions in time for tax season
Check the RRSP deadline for the current year – any amounts contributed before this deadline can be applied to your previous years’ income tax.
While this is a good overview of RRSPs, it’s always a great idea to speak with your financial institution or advisor to learn more. You can always visit the Government of Canada’s website as a resource, or contact the Canada Revenue Agency for any tax-related RRSP questions.
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