Registered Retirement Savings Plans have many benefits, both immediate and long term. Along with adding to your retirement income, RRSP’s also give an immediate tax break by lowering your net income for tax purposes. If you’re unsure whether you should contribute this year, or wondering how much you should contribute, there are a few factors to consider.
1. Do a dry run
You likely already have the majority of your tax info on hand (or at least a rough estimate). Sign into your TurboTax account and enter as much info as you can. If you have a balance owing once you’re finished, try entering some RRSP contributions to see the effect.
For a quick, less detailed estimate, try the TurboTax online calculator. Slide the arrows up or down to see the impact of RRSP contributions.
2. Are you considering buying a house or going back to school in the near future?
RRSPs can be used to finance part of your new home (first time home buyers only with some exceptions) or college degree. Programs such as the HBP (Home Buyer’s Plan) and LLP (Lifelong Learning Plan) allow RRSP contributions to be withdrawn without the usual penalties and repaid over time.
3. Does your spouse need more dollars in his/her retirement account?
If you’re the breadwinner in the family, you may be set up well for retirement through a company pension and CPP contributions. But what about your spouse? Have a look at spousal RRSP contributions to level the income playing field in the golden years. Remember that if you contribute to your spouse’s RRSP, you take the deduction on your tax return, not your spouse.
Other factors to consider include:
- Your contribution limit. This figure, based on income level, may change from year to year. Check your online CRA My Account or last Notice of Assessment to be sure you’re not over-contributing and facing a possible penalty.
- The RRSP deadline for 2016 is March 1, 2017. Contributions made to your RRSP up to and including March 1 can be used as a deduction on your 2016 return.
- Along with your RRSP contribution limit, RRSP contributions are also part of the Auto-fill my return With just a few clicks of the mouse, CRA My Account holders can populate their RRSP info, along with T slips, carry-forward amounts, and other tax data, directly into their returns quickly and accurately.
Still not sure if RRSP’s are the right choice for you? Check out our RRSP vs. TFSA post to see if perhaps a tax-free savings plan is a better option for you.