Yahoo Finance RRSP 2024 deadline: Best tips and mistakes to avoid with your contribution room
The RRSP contribution limit is $30,780 in 2024
With tax season approaching, Canadians have until Feb. 29 to make a contribution to their Registered Retirement Savings Plan (RRSP) that’s deductible from their 2023 income.
RRSPs are designed to help you save for retirement and that should be the “primary objective,” says Howard Kabot, vice president of financial planning at RBC Wealth Management. But if you’re looking to optimize your RRSP for increased tax-efficiency and savings, experts say there are several strategies and nuances to keep in mind.
Higher-income earners usually benefit the most
One of the first points to consider is how much money you made in 2023.
Since higher-income earners are taxed at a higher rate, their RRSP deduction will be worth more in tax savings, says Trevor Skidmore, senior manager of tax and estate planning at IG Wealth Management. As a general rule of thumb, he says Canadians with a marginal tax rate of at least 30 per cent will benefit the most – especially if their tax rate will be lower in retirement.
“Then you’re making the most of how the RRSP is designed,” Skidmore said in an interview with Yahoo Finance Canada. “You’re getting larger tax savings up front... and you’re paying less tax when you take [money] out.”
The savings could be even greater if an RRSP contribution moves you into a lower tax bracket, Kabot adds. As a result, you’ll get to keep a larger percentage of your overall income.
“There’s nothing better in tax planning than to be able to do that,” Kabot told Yahoo Finance Canada.
It might make sense to delay your deduction
When an RRSP contribution is made, there’s no requirement to claim the deduction that year. If you’re expecting your salary to increase significantly in the next couple years, you could maximize tax savings by waiting to claim the deduction, Kabot says.
“You might be thinking, I’m only in the 25 per cent tax bracket, but next year or two years from now... I’m going to be in the 50 per cent tax bracket,” Kabot said. “And I’m going to take my deduction at that point. That’s good tax planning.”
Skidmore agrees this strategy could prove beneficial for anyone expecting a big salary bump, but cautions against waiting too long to claim the deduction.
“You also have to consider the time value of money,” Skidmore said. “And what you can do with those tax savings today.”
Spousal RRSPs can lower your family’s tax bill
Married couples and common-law partners, especially those with significant income disparities, could lower their overall tax bill by using a Spousal RRSP, Kabot says.
Spousal RRSPs allow one spouse, usually the higher-income earner, to contribute to an RRSP in the name of the lower-income spouse. The contributing spouse gets to claim the tax deduction at their higher rate. And when the funds are withdrawn in retirement, they’re taxed in the hands of the lower-income spouse.
“It’s as if you’re contributing to your own RRSP, but you’re not,” Kabot explained. “You’re contributing to a Spousal RRSP, which gives the asset to your spouse, but allows you to take the tax deduction.”
In addition to immediate tax savings, Kabot says Spousal RRSPs can help couples balance their income in retirement, which should be the goal. A family with a gross income of $100,000, he notes, would save more tax dollars if each partner reported $50,000 – as opposed to one partner reporting the entire amount.
An RRSP loan might help – if you pay it off quickly
Understanding that not everyone has the ability to save, Kabot says one option is to take out an RRSP loan, which banks usually offer at a favourable rate.
“It’s sort of like a forced saving plan,” Skidmore said.
Another scenario where an RRSP loan might help, Skidmore adds, is when you’re using it to top up an amount you’ve already set aside to contribute. In this case, he says it’s possible you could pay off the loan almost immediately with the ensuing tax refund. If you’re using a loan to fund your entire contribution, that won’t be possible.
Interest rates are also a consideration, Skidmore says. Previously, the thought was that investment returns within an RRSP could outpace what you’re paying in interest on the loan. “That’s a tougher conversation these days with higher interest rates,” he noted.
Regardless, Skidmore and Kabot agree RRSP loans make sense only when they’re paid off quickly, before the interest starts adding up.
“And I’m talking months, not years,” Kabot said.
Don’t forget to invest
One of the key advantages of an RRSP is that investment earnings aren’t taxed until withdrawn, which helps to accelerate savings and compound growth. Kabot says it would be a “big mistake” to let the money sit in cash, or rely solely on fixed-income investments.
“I think you do need some equity exposure,” he said.
At the same time, Kabot advises caution because the money is ultimately meant for retirement. He suggests focusing on mainstream investments that aren’t too volatile and, ideally, working with an advisor for guidance.
Here are some additional tips to maximize RRSP savings:
Leverage employer matching: If your employer matches RRSP contributions, Kabot encourages Canadians to take advantage of this “free money.”
Direct your bonus into RRSP: Skidmore says some employers can transfer bonuses directly into an RRSP without withholding tax, which can “supercharge” your contribution.
Put tax refund towards financial goal: When possible, Skidmore advises Canadians to allocate their tax refund towards another financial goal, such as reinvesting into a Tax-Free Savings Account or paying down high-interest debt.
Work with a professional: A financial planner or advisor will help optimize your RRSP based on your specific situation, Skidmore adds.
Farhan Devji is a freelance journalist and published author based in Vancouver. You can follow him on Twitter @farhandevji.
