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.
We expect the 2022 RRSP contribution deadline (i.e. RRSP Season 2023) to run from January 1, 2023, to March 1, 2023.
During the RRSP season, you are allowed to make contributions to your RRSP account as though they were made during the 2022 tax year, and based on your contribution room as of December 31, 2022.
You will be able to claim a deduction for all eligible RRSP contributions made by March 1, 2023, from your 2022 income. The maximum RRSP contribution limit for 2022 was $29,210. The maximum RRSP contribution limit for 2023 is $30,780.
Why Make RRSP Contributions?
Looking for reasons to use up your RRSP contribution room from last year? Here are some ideas to consider:
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 2022 or before March 1, 2023, you can expect a tax refund of $4,000 relating to your RRSP contributions.
Basically, you will have saved $4,000 in taxes for 2022, or we can also say that you 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 lowers your taxable or net income. A lower net income can 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 2021, your recalculated CCB payments for the July 2022 to June 2023 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 some scenarios on how RRSP contributions can increase your CCB payments, click here.
3. Save for retirement
If getting a 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 for 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 some of it back when you retire.
If you have a spouse or common-law partner, you can contribute to their RRSP as well.
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:
- 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.
- 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 this detailed guide to robo-advisors in Canada.
- 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.
Wealthsimple is our top choice for robo-advisor in Canada. You get a cash bonus when you open an account here.
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 for when 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.
- How To Buy Stocks in Canada.
- How To Generate Income From Your RRSP in Retirement
- 5 Ways To Invest Your TFSA
- The Best Savings Accounts in Canada
- What Happens To an RRSP, TFSA, and RRIF After Death?
What are your plans for the 2023 RRSP season? Let us know in the comments section below!