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RRSP 2024 deadline is today: What you need to know (and whether you should contribute)

A man looks at a retirement planning brochure Monday, January 13, 2014 in Montreal. The deadline for RRSP contributions eligible for the 2013 tax year is March 1, 2014.THE CANADIAN PRESS/Ryan Remiorz
Canadians have until Feb. 29 to contribute to their RRSPs for the 2023 tax year. (THE CANADIAN PRESS/Ryan Remiorz) (The Canadian Press)

For years, Registered Retirement Savings Plans (RRSPs) have been touted as the best way for Canadians to save money for the future.

But with other government-registered savings accounts now available, some Canadians are wondering if RRSPs are as useful as they once were, says Emile Khayat, senior regional manager of financial planning at TD Wealth.

“We have more options now, which we didn’t have in the past,” Khayat said in an interview with Yahoo Finance Canada, highlighting Tax-Free Savings Accounts (TFSAs) and the new First Home Savings Accounts (FHSAs). “And I think this is why people are asking themselves, ‘Am I still doing the right thing?’”

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Here’s what experts are saying ahead of the Feb. 29 RRSP contribution deadline.

RRSPs remain ‘the best vehicle’ for retirement savings

Introduced in 1957, RRSPs are the oldest registered account offered to Canadians. And despite the newer options, Khayat believes most Canadians would still benefit from them.

“If it’s money you’re putting aside for retirement, it remains the best vehicle,” he said.

RRSPs have two main benefits, Khayat explains. The amount you contribute is deductible from your taxable income, which results in immediate tax savings. And investment earnings within RRSPs aren’t taxed until they’re withdrawn, ideally in retirement.

“So, it’s a way of not paying income taxes now, but paying income taxes later,” Khayat said. “It’s a great concept... because most people would have a lower taxation rate once they’re retired versus now when they’re working and they’re actively generating more income.”

Additionally, since RRSP contributions reduce your taxable income, they may affect eligibility for certain tax credits like the Canada Child Benefit and GST/HST credit.

“Many tax credits are linked to household income,” Khayat said. “The lower you declare your total income... the bigger the [credits] you’re getting on the other side.”

RRSPs aren’t necessarily for everyone

Sharon Perry, a chartered professional accountant and owner of Sharon Perry & Associates, agrees RRSPs are one of the best ways to obtain tax relief while saving for the future.

But they’re not suitable for everyone, she cautions.

“If you’re only making $20,000 a year, odds are you’re not paying much tax, if any,” Perry told Yahoo Finance Canada. “So, to put it into RRSPs, you’re not going to benefit.”

Lower-income earners who contribute to RRSPs could even end up in a higher tax bracket in retirement, Perry adds, accounting for the money they’ll also receive from the government through programs like the Canada Pension Plan (CPP), Old Age Security (OAS), and the Guaranteed Income Supplement (GIS).

“The last thing you want to do is invest in RRSPs now when you’re scraping to get by, to then take it out when you’re retired and be paying tax at a higher bracket,” she said.

As a general rule of thumb, Perry advises clients who earn less than $107,000 to consider other options. Canadians with pension plans should also proceed with caution, she adds. Since they’re already accumulating retirement income, they too could find themselves paying more taxes down the road if they also have significant funds in their RRSPs.

This scenario has played out for many of her retired clients.

“When they were working, they were raising kids and struggling paycheque to paycheque, because our cost of living is what it is,” Perry said. “So, they struggled, but they’re like, ‘Oh, but we have to put it into RRSPs.’ The missing component was, you already are. It’s just a pension plan through employment, which is really the same as an RRSP.

“The idea is that you’re saving for the future, but not so you pay more tax in the future.”

What are your savings goals?

Another important factor for Canadians to consider is what they’re saving for. If it’s for retirement, then RRSPs can be useful under the right circumstances.

RRSPs are also designed to help Canadians buy their first home or go back to school. In these cases, withdrawals can be made tax-free through the Home Buyers’ Plan (HBP) and Lifelong Learning Plan (LLP), provided the funds are repaid into the RRSP over a set timeframe.

Any other withdrawal would be considered income and subject to taxes. For this reason, Perry advises against contributing towards an RRSP for most short-term savings goals.

“If you’re saving for something like a car, you probably want to use something like a TFSA instead,” she said.

Common RRSP questions:

How much should I contribute to my RRSP?

In an ideal world, Khayat says the goal should be to save 10 per cent of your income. But that doesn’t necessarily mean it should all go into an RRSP.

“Someone with lower income would benefit from putting these funds into TFSAs versus someone who has a higher income, who would benefit from a tax deduction with RRSPs,” he said. “So, I think it’s better to just aim for a percentage of savings.”

Each individual will have their own RRSP contribution limit, which they can find in the CRA My Account portal. The maximum contribution for the 2023 tax year is $30,780.

Where should I invest my RRSP contributions?

For RRSPs, Khayat generally recommends focusing on lower-risk investments that generate interest income. Investments with more growth potential may be better off in a TFSA, he explains, since those capital gains won’t be taxed at all when withdrawn.

“Let’s say you double up on value,” Khayat said. “You invested $5,000 and it becomes $10,000. You’d rather not pay taxes on the $5,000 gained."

What should I do with my tax refund?

In today’s high interest rate environment, Khayat says Canadians should consider using their tax refund to pay down debt.

“It wouldn’t have been the same answer if you asked me the same question five years back,” he said. “But now, it’s definitely the best thing to do.”

If you don’t have debt, or still have low rates, then it’s often wise to put the money back into your RRSP or TFSA, he adds. As for those who want to put their tax refund towards a much-needed vacation, Khayat says “it’s much better than borrowing money” if that’s the alternative.

Farhan Devji is a freelance journalist and published author based in Vancouver. You can follow him on Twitter @farhandevji.