Not talking about RRSPs in the middle of February? Would I be non-conformist at this point? The truth is that I was going to forget the inescapable subject of the “first 60 days of the year” since this tool for preparing for retirement, I teach throughout the year. But since for many savers, the deadline of 1er March raises many questions, here are some surprising statements about the RRSP and some situations that justify making a catch-up contribution in the coming days.
“I don’t believe in that, me, RRSPs. » Believe it or not, I hear this regularly. As if contributing to an RRSP was an act of faith, based on the beliefs of your neighbor or your co-workers (“I was told this is not good”)…
For the majority of people, taxable income is higher during working life than in retirement. Since the return accumulates tax-free, it is the preferred vehicle when saving for the long term. People with low incomes could favor the TFSA in order to avoid the clawback of Old Age Security, for example.
Once again, it is not a question of relying on belief, but of doing a rational analysis with a professional, if you doubt it. It is important to take into account the fact that efficiency is not limited to the advance tax refund in the spring, but also to the reduction of your applicable tax rate, including several socio-fiscal measures.
“Anyway, I’m going to pay taxes on the withdrawals. » Indeed, the RRSP contribution reduces your taxable income on your tax return in the year of the deduction, its withdrawal will have the opposite effect at the time of the withdrawal. The RRSP makes it possible to defer the tax in time and not to make it disappear!
But one of the basic rules in taxation is to defer the tax as far as possible in time. You’ll get richer from lowering the tax bill each year, especially if you use the tax refund for financial strategies.
For example, you should contribute to an RRSP for the following year, invest in an RESP for your children or pay off “bad debts”.
“An RRSP doesn’t pay anything. » This common statement illustrates a misunderstanding of the distinction between the tax treatment of your contribution and the investment choice as such. Many tell me that they have already had a mediocre return on their RRSP, but the return cannot be explained by the very fact of investing in an RRSP. The return varies according to the choice of investment.
If you use a registered stable savings account or a registered bank account offered online or in a branch by your banking institution, for example, you must understand that these products with guaranteed capital only offer very low returns.
Whether they are used in an RRSP or not, the result will be the same. Same logic for a mediocre investment fund: it will be mediocre whether it is held in a TFSA or not.
In short, the relevance of the RRSP is defined by tax criteria and its performance by the quality of the investment choices that will be held in your plan.
A contribution is required by the 1er March. Here are some examples of situations justifying without hesitation to resort to an RRSP by the 1er March. Of course, this list is not exhaustive.
You sold a business or realized a large capital gain on the sale of property in 2021. If the transaction exceeded the maximum capital gain deduction amount ($892,218) or did not qualify, it could act a good year to massively catch up on your contribution rights.
You are a new self-employed worker and you have not made any installment payments. A simulation will allow you to estimate the taxes to be paid on April 30, based on the statement of your income and expenses on December 31.
You could indeed have to pay a hefty tax bill since, unlike compensation by salary, no tax is withheld at source on your self-employment income. If you have unused RRSP contribution room, now is probably a good time to use it to reduce this bill, but also to reduce the amount of installments to be paid in 2022.
You have dependent children. Remember that the majority of family support programs, such as the Canada child benefit, are based on taxable family income.
In addition to the traditional “tax return” that comes to mind when you think of an RRSP contribution, you must include this increase in disposable income for your household in the tax efficiency calculations.
Your employer offers you a bonus. Congratulation ! Did you know that if he deposits it in your RRSP, he is not required to deduct taxes on this amount? You will thus be able to enjoy the full amount as an investment rather than receiving only half of the amount after deductions.
You have never contributed or have very little personal savings. It’s never too late to start! You will benefit from setting up an automatic investment program every month or every paycheck, if only for deductions in 2022.
Recourse to an RRSP loan could also allow you some catch-up for retirement or to acquire a first property in the coming years.