RRSP: More Money in Your Pocket

It’s February Already!?

February is a month popularly known for two things: Valentine’s Day and the Registered Retirement Savings Plan (RRSP) contribution deadline. Yes – it’s that time of year again when Canadians rush to make a last-minute RRSP contribution to put money aside for the future while also enjoying a tax break.

TIP: This year’s deadline is Monday, February 29th.

With newer, viable saving options, like the Tax-Free Savings Account, our clients often ask us if it still makes sense for them to make an RRSP contribution, especially since the income is eventually taxed when withdrawn. The RRSP contribution remains the most favourable way for the vast majority of Canadians to reduce income taxes and save for retirement.

Our RRSP philosophy is simple: 1. Contribute, 2. Contribute Often and 3. Contribute Early

Let’s explain why:

Your RRSP contribution is a deduction against your total income, reducing taxable income and ultimately reducing tax liability. Here’s an example of how an RRSP contribution can save you money for the 2015 tax year.

Salary $80,000 $80,000
RRSP contribution (and deduction) $0 $10,000
Taxable income $80,000 $70,000
Tax liability (source: www.taxtips.ca/calculators/basic/basic-tax-calculator.htm) $18,061 $14,801
Tax savings realized $3,260

Think of what you could do with an additional $3,260 in your pocket!

More importantly, the RRSP is a tax shelter which means that any investment income you earn is tax-deferred. That $10,000 contribution, in the example above, will grow to $16,300 inside an RRSP, in just 10 years’ time, assuming it earns a 5% annual rate of return.

In addition, if you also contribute the $3,260 of tax savings to your RRSP, in 10 years at 5% rate of return, you would have $5,310. So, your total investment of $13,260 would grow to $21,600. That’s an 8% return on a $10,000 investment – not bad!

TIP: Check your 2014 Notice of Assessment to see how much you can contribute to an RRSP for the 2015 tax year. You can also access it online here.

Take this one step further and make your RRSP contribution at the beginning of the year, instead of right before the deadline, to maximize an entire year’s worth of tax-free compounding. You could’ve made your contribution for the 2015 tax year as early as January 1st 2015. For your 2016 RRSP contribution, if you have the funds available, consider making your contribution now. Otherwise, consider setting up a monthly pre-authorized contribution plan (or ‘PAC’). This ensures that you pay yourself first every month.

TIP: Check to see if you are maximizing your contributions to your employer-sponsored savings plans; these too are ‘pay-yourself-first’ plans that make saving easier.

Still not convinced? Please contact us to learn more about the impact an RRSP contribution will have on your retirement plan.

Happy saving!

– The Bespoke Financial Team

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