Why You Should Contribute this RRSP Season

Now that it’s RRSP season, it’s time to  dust off your finances and see if you can  boost your retirement nest egg, and get  a tax deduction as well. Here’s what  you need to know about RRSPs.

RRSP: The Basics

If you have Earned Income, a Social  Insurance Number and are 70 or  under, it’s possible to contribute to  an RRSP. RRSP season is the first 60  days of the year when it’s possible to  make a contribution and apply the tax  deduction to the previous year. You can  still lower your previous year’s tax bill —  and improve your retirement portfolio  — as long as you are within that 60 day  time threshold.

How much can you contribute?

The contribution for the year is the  lower of 18% of your Earned Income  from the previous year or the maximum  annual contribution limit for the  taxation year (less any company sponsored  pension plan contributions).  For income from 2014, the maximum  contribution is $24,930.

One of the great things about the RRSP   is that you have the ability to carry  forward unused contribution room. For  most taxpayers, the easiest way to find  your RRSP limit is to look for your CRA  Notice of Assessment. When your tax  return is processed, Canada Revenue  Agency sends this to you each year.

How the RRSP Can Benefit You

Not only do you receive a tax deduction  for your contributions you also benefit  by growing your wealth over time,  making for a happier retirement.  Over the long-term, tax deferred  compounding really helps your RRSP  grow faster. In your RRSP, you can hold  any number of investments, including  stocks, bonds, and various funds. If you  consistently invest money, the magic  of tax deferred compounding means  your nest egg grows better over time,  resulting in a larger portfolio in the end.

Defer the tax deduction

Another great feature of the RRSP is the   fact that it’s possible for you to defer  your tax deduction if you wish.  If you know that you will be in a higher  tax bracket next year, or the year after,  you can make your contribution this  year, pay tax as usual, and “save” the  deduction for a time when your higher  tax bracket means that you benefit  more. And, in the meantime, your  investment continues to grow taxdeferred.

Other uses of the RRSP

Finally, it’s possible to use your RRSP  to achieve other financial goals. If you  have been saving up to buy your first  home, your RRSP can be used in your  strategy. Say you’ve been saving up,  and you have $25,000 to use as a down  payment on a home. You also have  $20,000 in unused RRSP contribution  room. You can take part of that chunk  of capital you have saved up and use it  to fill up your contribution room. Now,  you have a tax deduction. Because you  can use money from your RRSP penalty  to buy your first home, you can turn  around and take that money out again  for use in your down payment.

So, you have a tax benefit, just for  knowing about this little trick.  It’s also possible to use your RRSP  to give yourself a student loan. You  can borrow up to $20,000 to pay for  qualifying education, but you have  to pay it back over 10 years. Still, it’s  better to borrow from yourself — and  pay yourself back — than it is to pay  interest to someone else.

Before RRSP season comes to a close,  evaluate your situation and determine  whether or not it makes sense for you  to employ a new strategy. RRSPs may  not be for everyone but it still remains  the best tool for retirement savings  because of its powerful tax benefits.

Jim Yih is a best-selling author, fee-only  financial advisor, a professional speaker  and the founder of the award winning  blog www.RetireHappy.ca. You can find  him on twitter @jimyih.