As the RRSP deadline for the 2023 tax year approaches, remember, investing in your future is not just a February ritual but a year-round commitment. The RRSP, a stalwart of Canadian retirement planning remains a vital tool for those without employer pension plans, offering tax-deductible contributions and tax-free growth.
With the February 29, 2024 deadline looming, here are 10 strategies and insights to optimize your RRSP contributions:
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Maximize Contributions: For 2023, the RRSP contribution limit is 18% of your 2022 earned income, up to a maximum of $30,780. Don’t forget, if you’re part of an employer pension plan, your limit may be reduced by a pension adjustment. Your RRSP contribution room can be found on your Notice of Assessment you receive from the CRA, or online in your CRA My Account. Excess contributions are subject to penalties, so if in doubt speak with your advisor.
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Carry Forward Unused Room: Can’t contribute the maximum amount to your RRSP this year? No worries. Unused contribution room can be carried forward indefinitely. Your Notice of Assessment from the Canada Revenue Agency (CRA) will indicate your current available room including any unused carry forward room.
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Contribute Early and Often: The sooner you contribute to your RRSP, the sooner your money starts working for you. Consider setting up monthly contributions to spread out the financial impact and boost your compound investment growth. And if you fill out form T1213 form (Request to Reduce Tax Deductions at Source) and indicate how much you plan to contribute to your RRSP next year, you can request reductions in your deductions at source from your employee payroll to get the tax benefit right away.
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Delay Deductions if Necessary: If you are in a lower income year but expect to be in a higher tax bracket in subsequent years, you can still contribute to your RRSP in the current year to maximize investment returns but can choose to hold off on claiming the deduction until you’re in a higher tax bracket. This strategy can yield greater tax savings down the road.
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Spousal RRSP for Income Splitting: Planning ahead for tax minimization for the family is a helpful retirement planning strategy. One way to do so, is to contribute to a spousal RRSP to balance retirement income between spouses and to potentially lower your combined tax burden in retirement. Remember, the total contribution to yours and your spouse’s RRSPs can’t exceed your personal limit.
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Diverse Investment Options: Your RRSP can hold various investments, including GICs, mutual funds, bonds, most stocks, and more. Diversifying your investments can help manage risk and maximize growth. In addition, keep in mind the added benefit of holding U.S. Dividend Paying stocks within your RRSP. Unlike U.S. shares held within a non-registered account or TFSA, U.S. dividends paid are not subject to foreign withholding taxes because of the Canada/US tax treaty.
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Contributions In-Kind: Have investments outside of RRSPs? You can transfer them in-kind to your RRSP. Be aware of potential capital gains tax if the asset has appreciated in value.
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Final Contributions Pre-RRIF: Convert your RRSP by December 31 of the year you turn 71. Consider a final contribution if you’ll have earned income in that year to maximize your nest egg.
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Strategic Early Withdrawals: Withdrawing from your RRSP before retirement might make sense during low-income years. However, consider the impact on your long-term savings and potential tax implications.
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Stay Informed: The CRA frequently updates tax rules. Regularly review changes and consult with your financial advisor to ensure your strategy remains optimal.
Remember, the RRSP isn’t just about tax savings today; it’s about securing your financial future. By staying informed and proactive, you can build a comfortable retirement while optimizing your current tax situation. Don’t wait until the last minute – start planning your RRSP contribution now and consider how you can continuously contribute throughout 2024. Speak to an advisor at Kerr Financial to learn more.
