RRSP contributions are an interesting topic for a number of reasons. Everyone seems to think they will have money set aside at the end of the year to contribute. Does this always happen? The reality is, most people scramble in February each year to scrape together the necessary funds to make a significant contribution. Let’s chat about this today, and discuss some techniques you can implement to avoid this last minute panic.
Eventually, you’re going to get old. Really old. In fact, you’ll be so old, you won’t be able to work anymore! Many years ago, the Canadian government realized this would eventually become a massive social and economic problem. People need to save throughout their lives to provide for themselves in old age. However, few people give much thought to this in their 20s, 30s, or even their 40s. The Government realized something had to be done. People had to be incentivized to save for the future each year.
Enter the RRSP, or, Registered Retirement Savings Plan (often abbreviated to simply RSP). An RSP is simply a pool of money that, if you register it with the government, and follow certain rules, you are allowed to use it as a deduction against your taxable income each year. Often people are confused on this topic. Please be aware that an RSP by itself is nothing. It is simply a vehicle that you put funds into, be it cash, bonds, mutual funds, stocks, gold bullion bars, pork belly futures, or whatever it is you happen to invest in. That money is allowed to grow tax-free until you withdraw it. Ideally, you deposit these funds throughout your life as your income grows, and generate a nice tax deduction each year. Then, once you’re retired, you withdraw this money. It gets taxed at this point, but ideally since you are no longer working, you have moved into a much lower tax bracket, and thus save a tonne of money.
So what about this March 1st date? This is the deadline each year for making contributions to your RSP to take advantage of a tax deduction for the previous tax year (i.e. this past March 1 2013 was the deadline to make an RSP contribution, and generate a deduction against your 2012 taxes). The government actually gives you some more time after the end of the calendar year to make contributions, since they know most people don’t think about their taxes until April.
Now, when should you contribute? Just wait until February right? I’m sure you’ll have plenty of cash kicking around then you don’t need. Who doesn’t have a few thousand dollars burning a hole in their pocket at any given time? The problem is, most people say they’ll put away money for their RRSP “next month”. Only problem is, next month never comes, and suddenly it’s February, and you want to save for retirement and generate a nice tax deduction.
So what’s the solution? Contribute to your RRSP on a set schedule. My favourite is an automatic deduction from your paycheque (if you have a company sponsored RSP plan and this is an option). Go visit HR, and ask them for a form to have this set up. It’s often quite simple. Get a set amount, say 5-10% of your pay, to be automatically withdrawn from your paycheque on a regular basis (bi-weekly, monthly, etc) and deposited directly into an RSP. This way, you never even have the chance to spend the money. I know what you’re thinking “how will I be able to survive without that extra cash?!”. Calm down, you’ll be fine. It seems like a lot at first, but if you try this for a month, you’ll likely realize your standard of living has not dropped at all. Eventually, you’ll forget you’re even doing this . . . except when your quarterly RSP statement arrives in the mail, and you’re pleasantly surprised by the swelling nest egg you’re building, effortlessly I might add.
To sum up: Contribute to an RRSP. In today’s world, you can no longer count on a comfy pension or the government to take care of you in 40 years. Contribute on a regular basis. Don’t run into the problem of needing an RSP loan at the end of each year (yes, these exist)! And finally, make it automatic.
How much can you contribute? What should these funds be invested in? What about TFSAs?? These are all great questions, and ones I will get to in subsequent posts.
Have any questions? Contact us today at 1-855-256-8552 today for a free consultation.
Christopher Stead, CPA, CA, MSc
