RRSPs: Deadline or not, it’s never too late to learn more, or to contribute!
As we near the end of the deadline for RRSP contributions, some people may be frantically thinking that if they don’t contribute to their RRSPs, they will lose out on something. Let us ease your mind by saying that it’s not true at all! Although your RRSP contribution for the 2017 tax year is due by March 1, 2018, the fact is that your contribution room actually accumulates throughout your entire working life. About a month ago we talked about RRSPs, and you can find the link for the article here.
Today, let’s have a quick refresher, plus we will learn a bit more about the technicalities of the RRSP and why it has been a long-time staple in the financial plan of so many Canadians. More importantly, we’ll learn why not making an RRSP contribution by the deadline really isn’t as awful as so many people believe. Let’s get started.
1. You earn RRSP contribution room by having a working income
The CRA assesses your reported working income and you will earn 18% of that as contribution room. If you decide not to use your contribution room, it actually accumulates, and never goes away. Theoretically speaking, if someone never contributes to their RRSP their entire life, they could have hundreds of thousands of unused RRSP contribution room.
2. The RRSP contribution gives you a deduction
This means that if someone earns $50,000 a year, and they contribute $5,000 into their RRSP, they only need to pay taxes on $45,000 worth of income. This could mean a reduction of around $1,000-$1,500 of taxes paid.
3. You can contribute as much as you want, up to your available contribution room
Going back to our previous example, if the same person, who earns $50,000 annually, suddenly had an extra lump sum of $30,000, he or she could technically contribute $30,000 into his RRSP, provided he has the room for it. Resulting in that year’s taxable income lowering to $20,000.
4. When making a withdrawal from an RRSP you’ll have to pay full income tax
Ideally, you would make withdrawals from your RRSP once you’re retired. The idea is that in retirement, people would generally have lower income. So even though you’re making withdrawals from your RRSP, it will be balanced out by the fact that you’re not making as much working income.
As you can see, if you combine the above points, you never “lose out” by not contributing this year. For the vast majority of people, it doesn’t really make a difference whether you decide to contribute this year or the next. As long as you keep in mind that contributing something is always better than contributing nothing. Don’t feel down if you haven’t made a contribution this year, because you’ll get that tax deduction next year too!
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