Contributing to your RRSP is one of the most beneficial and efficient ways to both save for retirement and reduce your taxes.
RRSPs offer immediate tax relief by lowering your taxable income. There are also ways to lower how much tax your employer withholds from your pay-cheques ensuring that you do not over-pay on your income tax – which is essentially providing the government with an interest free loan for the year.
RRSPs are also designed with the objective of long-term investing. The very nature of this type of investment vehicle is such that there is great incentive to avoid “dipping” into your savings. This encourages individuals to stay invested over the long-run and reap the full benefits of market activities. Remember, the tortoise wins the race.
Any income you contribute to your RRSP is not taxable until you withdraw it from your account. This means your investments can grow on a tax-deferred basis right up until your 71st birthday and fully benefit from compound growth.
Things to keep in mind with RRSP’s
· You have 60 days after the calendar year end to make an RRSP contribution and deduct that contribution on the previous year’s tax return. This usually results in a deadline on or around March 1st
· Generally your RRSP contribution limit increases by 18 per cent of your previous year’s earned income to a specific dollar maximum.
· If you did not contribute the maximum to your RRSP each year, the contribution room not used has been carried forward and is available for use in subsequent years
· The best way to determine your RRSP contribution limit is to look at your most recent Notice of Assessment sent to you by the Canada Revenue Agency after you file your tax return each year
Without Further ado, here are 7 key tips for RRSP planning:
1.) Maximize your contribution
The less tax you pay, the more money you will have working towards your retirement goals. Your RRSP is one of the most powerful ways to protect your investments from taxes. Not only do you enjoy an immediate tax deduction, but your earnings within the plan grow and compound on a tax deferred basis until you withdraw money from the plan.
· A $10,000 RRSP contribution
· Equals $4,500 in deferred tax savings
Remember – a $10,000 RSP contribution could equal $4,500 in tax savings (if you are in the 45% tax bracket)
2.) Spousal RRSP
In 2007, the federal government introduced the ability for couples to allocate up to 50% of their ‘eligible pension income’ from one spouse to the other for taxation purposes. This is called Pension Income Splitting and it could reduce a family’s combined tax bill. “Eligible pension income” is income the qualifies for the federal Pension Income Credit and includes periodic pension income plus RRIF income where you have attained age 65.
A Spousal RRSP is an RRSP for the benefit of one spouse, but the contributions to the plan are made, and deducted, by the other spouse.
Spousal RRSPs are a good strategy if you expect one spouse to be in a lower tax bracket in retirement because they provide the benefit of balancing retirement income between spouses.
3.) Make “tax efficient” deduction decisions
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