If you haven't contributed to your registered retirement savings account (RRSP) this year, you're not alone. According to the most recent figures from Statistics Canada, only about half of Canadians make contributions in any given year. But as the March 1, 2013, deadline looms, you still have some time to contribute. And you should, because despite the apparent lack of enthusiasm for RRSPs, they are one of the few investments with a guaranteed return in the form of a reduction in your taxable income. If you contribute enough, you could get a cheque from the government (and what's not to love about that?).
Let's look at a few last-ditch ways to contribute this year ...
1) Roll over other investments
If you happen to have other money saved or invested that isn't registered, this can be a great source of last-minute funds for your RRSP. Maybe you purchased a stock on a recommendation from a friend, or saved some cash in a guaranteed investment certificate (GIC) but no longer intend to withdraw the money. Head to the bank and ask your advisor to register those funds. They'll automatically count as an RRSP contribution. Plus, if you make a decent return, you won't have to pay tax on it.
Cutting down on expenses is tough around the holidays, but if you can scrape together a little money each month, you can make a contribution to your RRSP before the deadline. Sit down with your bank statements from the last couple of months, and enter your expenses into a spreadsheet based on their categories: food, mortgage/rent, utilities, debt payments, transportation, and insurance. Generally, those categories are pretty static, so look for expenses that fall outside those areas as opportunities. Do you often head out for dinner once or twice a week? If you can manage to eat in for a few months, you could bank up to $1,500 for your RRSP. Plus, with all the holiday parties, staying home may be a good way to keep both your budget and body in shape.
3) Do your taxes early
The deadline for making RRSP contributions (March 1, 2013) allows taxpayers time to calculate their tax liability and determine how to maximize the impact of RRSP contributions on what they'll owe. This is easy to do with the electronic filing programs that are now available, many of which are compatible with Revenue Canada's NETFILE, allowing you to file your taxes online. Fill in your income and deductions as the program instructs.
If you haven't contributed to your RRSP, play around with adding what you think you can come up with for an RRSP contribution before the deadline. The more you add, the more likely you are to get a tax refund.
Doing your taxes ahead of time will allow you to calculate how much your contribution will affect your return. If you run the numbers on your taxes in January, you'll still have two months to kick some cash into your RRSP and influence the outcome before you file. And if you get that tax refund, consider putting it straight into your RRSP for next year.
4) Borrow to invest
Although the banks may advertise RRSP loans, don't necessarily assume this is the right option for you: this is an RRSP strategy that can be tricky to pull off and warrants advice.
Suppose that you borrow $10,000 for an RRSP. This will cost you about $270 in interest in one year (at a 5 percent APR). This is a relatively small price to pay compared to the tax savings this contribution will produce, which should be somewhere between approximately $2,500 and $5,000, depending on your tax rate. Plus, you will get tax-deferred growth on your investment (meaning you won't have to pay tax on those funds until you withdraw them as income).
However, while this sounds like an easy way to plug some money into your RRSP and reduce your tax rate, it's really just forced savings. After all, you will have to spend a good portion of the next year paying off that loan, at a rate of about $856 per month. If you put your tax return toward paying off your loan, this will help make things easier.
But consider this: If you can find the money to repay an RRSP loan, why not just save that $856 per month in the first place? RRSP loans are a last-minute way to make a contribution to your account, but they can also lead to a continuing cycle of borrowing to invest. It's better than nothing, but you still lose money to interest - and run the risk of being unable to repay the loan.
It's tax-free money, baby!
If you haven't put a penny in the bank yet, it's not too late to cash in on the tax and savings benefits RRSPs provide. That said, the best way to maximize your contributions is to set aside some money from each paycheck to your RRSP.
Whatever you do, don't get drawn into believing that RRSPs don't pay. After all, nothing's worth more than (tax-free!) money in the bank.
GoldenGirlFinance.ca is a free personal finance and education site for women.
Nothing contained herein is intended to provide personalized financial, legal or tax advice. Before implementing any financial strategy, you should obtain information and advice from your financial, legal and/or tax advisers who are fully aware of your individual circumstances.