It’s been a very odd year but we all remember what a last call is…right? All jokes aside, you have until March 1, 2021 to contribute to your RRSPs for it to count for the 2020 tax year.
Why contribute? We are glad you asked! Consider the tax savings. You will not pay any income tax on every dollar you put into your RRSP (up to your maximum – more on this later). If you are a salaried employee this means that it will almost certainly mean a generous tax refund.
While we are planning your contribution, it may be worth your while to talk about the Home Buyers Plan (for first time home buyers) and Lifelong Learning Plan (to finance your education). If you are planning to do either this year and have put some hard-earned cash away for either of those purposes, you could invest it into an RRSP before March 1st, and withdraw the funds when you need the money without any penalties (provided you pay the RRSP loan back before the deadline). This way you could still use your money the way you intended to, but also enjoy a lovely tax savings. That’s what I call a win-win.
If you qualify for the Canada Child Benefit, an RRSP contribution could increase the amount you receive because this amount is calculated on your taxable income and RRSP contributions lower your taxable income.
How much can you contribute? I told you there would be more on this topic. Generally speaking, your RRSP contribution limit for the year is 18% of your earned income you reported in the previous year up to a maximum of $27,230. If you have not contributed before or have not reached your limit in any given year you have earned income, the unused portion of your contribution limit rolls over to the next year. You can find out exactly how much RRSP contribution room you have by consulting your latest notice of assessment or by logging into your CRA account online. If you have any troubles, we can assist you as well.
Invest your tax refund. Tax refunds can be a great financial tool if you use it correctly. Paying down debt may be the first priority, but if you have no debt, consider investing in an RRSP…it will only increase your tax refund for the following year!
Watch out for big refunds every year. This might sound odd…but having a big refund every year means that you are extending an interest-free loan to the government every year. If you are finding yourself with a sizeable refund year after year, talk to us to see if you should not update your tax information with your employer.