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December 2019 update

It’s that time of the year again when you get around 60 days to catch up on your RRSP contributions for the previous year. An RRSP account keeps your investments tax-sheltered (until withdrawal) and is a great way to save for retirement.

Officially, the 2019 RRSP Contribution deadline (i.e. 2020 RRSP Season) runs from January 1, 2019, to February 29, 2020. Since February 29, 2020, falls on a weekend, you get an extension until the next business day which is March 2nd.

During the RRSP season, you are allowed to make contributions to your RRSP account as though they were made during the 2019 tax year, and based on your contribution room as of December 31, 2019.

You will be able to claim a deduction for all eligible RRSP contributions made by March 2, 2020, from your 2019 income when you file your tax return. The maximum RRSP contribution limit for 2019 was $26,500. The maximum RRSP contribution limit for 2020 is $27,230.

RRSP Season – Contribution Deadline of March 1, 2019

Why Make RRSP Contributions?

Looking for reasons to use up your RRSP contribution room from last year? Here are some reasons for you:

1. Save On Taxes

You will get a refund on any taxes payable on the amount you contribute to your RRSP. This refund is equal to your marginal tax rate.

For example, if your marginal tax rate is 40% and you contributed $10,000 to your RRSP either during 2019 or before March 2, 2020, you can expect a tax refund of $4,000 relating to your RRSP contributions. Essentially, you will have saved $4,000 in taxes for 2019, or we can also say that you will have deferred those taxes to the future. 😉

For more on how to save on taxes by maximizing your RRSP contributions, check out this article.

2. Supercharge Your CCB

Following from point #1, contributing to an RRSP account also lowers your taxable or net income. A lower net income may make you eligible for more income-tested government (provincial and federal) benefits, such as the Canada Child Benefits (CCB).

CCB benefits are updated every July i.e. after-tax returns are processed. With a lower taxable income in 2019, your recalculated CCB payments for the July 2019 to June 2020 period could be significantly increased, depending on where your income falls on the sliding benefits scale.

Another income-tested benefit that will benefit from you lowering your taxable income, is the GST/HST credit.

For sample scenarios on how RRSP contributions can increase your CCB payments, check out this article.

3. Save for retirement

If getting a fat and juicy tax refund in April is not enough to motivate you to contribute to an RRSP account, or you do not get the CCB, there’s one additional reason to do so: Retirement! 😉

The idea behind the creation of the RRSP is to encourage Canadians to save towards their retirement. It’s a WIN-WIN situation for you and the government.

You get to invest in a tax-deferred account, keeping and re-investing gains and staying tax-free until you start withdrawing funds in retirement. On the other hand, the government loses some revenue in the short term, only to recoup most of it back when you retire.

If you have a spouse or common-law partner, you can contribute to their RRSP as well.

Some Cheaper Investing Options For Your RRSP

It makes sense to lower your investment fees if you want your retirement funds to grow faster. Options to save on fees include:

  1. Using a self-directed brokerage account where you can build your portfolio of stocks, ETFs, etc. If you are confident with managing your own portfolio and are willing to re-balance it as appropriate, this option is for you.
  2. Using a robo-advisor: Robo-advisors simplify the investment process, invest your assets and re-balance your portfolio automatically, all at a much lower management fee than traditional mutual funds. Check out my complete guide to robo-advisors in Canada here.
  3. Utilizing index funds: Index funds are similar to mutual funds, however, they are managed passively and charge lower fees. Here are some index fund options for beginner investors.

Are RRSP Contributions Right For Me?

RRSP contributions are awesome, however, you may benefit more from first maximizing your TFSA if you are currently earning a low-income (i.e. in a low-tax bracket). With a lower marginal tax rate, your RRSP deductions will return a lower amount to you in tax refunds.

Strategies if you’re temporarily in a low-tax bracket include:

  • Maximize your TFSA before you start making RRSP contributions. In the meantime, your RRSP contribution room will continue to grow.
  • Make RRSP contributions but do not request a tax deduction until you move into a higher tax bracket – to get more in tax refunds.

If your employer is matching your RRSP contributions in any way, you will be wise to take them on their offer and not leave free money on the table, irrespective of your tax bracket.

These are just a few of many scenarios that may present themselves. For a customized approach that works best for you, consider talking to a financial advisor.

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