2017 RRSP Contribution Deadline
The annual contribution deadline for RRSPs has just recently passed on March 1, 2017. To be eligible for a tax deduction in the previous year, your RRSP contribution must be paid prior to end of the first 60 days of the current year – which, for this year, was March 1, 2017.
If you didn’t take advantage of this tax deduction, now is a great time to get caught up on the benefits of contributing to your RRSPs on an annual basis.
Refresher – What is an RRSP?
A RRSP, or a registered retirement savings plan, is a tax savings and tax sheltered account that can be opened at most financial institutions. These accounts are registered by the federal government of Canada and are subject to rules and limitations as to how much you can contribute and the types of investments that they can hold.
The main benefits of RRSPs are that the contributions are tax deductible, meaning that they can be used to reduce your taxable income which reduces you’re the income taxes you pay at the end of the year. This doesn’t mean they’re exempt from tax forever however. In retirement when people start to withdraw money from this type of account, the amount withdrawn will be taxed as income. Most of us, however, are in a higher tax bracket during our working years compared to retirement, meaning that when you are taxed on this income in retirement, it will be at a lower rate.
Anyone in Canada who earns an income, has a social insurance number, and has filed a tax return can contribute to an RRSP. They’re an excellent way to save for your retirement while lowering your income taxes.
Click on the link here to can read more about RRSPs and common RRSP myths.
RRSP Contribution Limits
RRSP contribution limits are defined as 18% of your earned income for the previous year, up until a maximum limit of $25,370. For the 2017 tax season, that limit will increase to $26,010. However, there are a few adjustments to be made when calculating your limit: any contributions you made to an employer’s pension plan would be deducted from your limit, while any unused contribution room accumulated since 1990 is carried forward.
Let’s put this into context. Suppose you made $60,000 in 2016, and contributed $9,000 to your RRSPs before the March 1, 2017 deadline. In British Columbia, the average income taxes for an income of $60,000 would be $10,316. With $9,000 in contributions to an RRSP, your total income taxes would reduce to $7,817, saving you $2,499 while helping you save for retirement. Your annual contribution limit would be 18% of $60,000, or $10,800, meaning that in 2017, you’d have an additional $1,800 of RRSP contribution room carrying forwards.
Ideally, you should consider using your entire contribution room each year. There are two main benefits to this. Firstly, you reduce your income taxes by the maximum amount allowed by the RRSP contribution room, and secondly, using your entire contribution room or catching up on unused contributions quickly will allow your contributions more time to grow on a tax-deferred basis.
Interested in seeing the impacts of your RRSP contributions on your income taxes? Easy Tax Canada created an interactive calculator, found here, that can provide you with some estimates.
RRSPs and Spousal Contributions
Beyond the tax benefits and retirement planning, RRSPs currently offer the ability to split future income with your spouse. There are rules surrounding this, but the benefit of doing so is best when there is a disparity in the levels of income between partners during their working years or even their incomes at retirement.
Suppose one partner made $90,000, while the other made $45,000. This means the higher-income partner would have the ability to contribute $16,200 into their RRSP, while the lower-income would only have half of the amount. If they each contribute the full amount from age 25 to age 65, then the higher-income spouse would have $648,000, while their spouse would have $324,000. The spousal RRSP would allow the higher earner to save money on a higher rate of tax while contributing to the spouse’s account, allowing each spouse to have $486,000 plus growth on the money at retirement.
Splitting the income, or contributing to a spouse’s RRSP, makes most sense when the higher-income spouse contributes to an RRSP for the lower-income spouse. The higher-income spouse receives the benefit of the full tax deduction, while splitting the income and allowing both spouses to be taxed at the same, lower level in retirement.
Additionally, if one spouse is older than the other, other benefits exist. Canadians have the ability to invest in RRSPs until the year they turn 71, and can contribute to a spousal RRSP until their spouse also turns 71. What this means is that the older spouse can take advantage of the tax benefits for a longer period of time through contributing to their spousal RRSP.
Even though current pension splitting rules may make a spousal RRSP account seem unnecessary. There is no guarantee that these rules will remain in the future.
RRSPs are an excellent way to reduce your annual income taxes and save for retirement. Always meet with a financial professional to discuss your need prior to making any investing decisions.