- January 28, 2019
- Posted by: Asif Rahemtulla
- Categories: Business, Taxes
We are smack dab in the middle of “RRSP Season”. The first 60 days of the year is a time when Canadians have the opportunity to contribute to their registered retirement savings plans and have those contributions deducted from their previous year’s incomes. The general consensus is that early-year RRSP contributions help to get a bigger tax refund.
In addition, adding to your RRSP total puts you in a better financial position for retirement. Of course, this also heavily depends on just how much you regularly contribute to your RRSPs. With that said, you may not want to run off to your bank just yet. There are a few pros and cons to weigh when considering your reasons for contributing to your RRSPs by March 1st, which is the deadline for tax year 2018.
You want to get a big refund.
PRO: Who wouldn’t want a big injection of cash in their bank accounts? Most Canadians have big plans for their tax returns each year. Some wish to renovate rooms of their homes, others have vacation aspirations and then there are those who really could use the extra dough to pay off some debts. A sizeable tax return can be just what the doctor ordered for your current financial situation.
CON: Such plans for your big refund don’t necessarily help your end game. If you’re looking to retire early, you should consider reinvesting your refund back into your RRSP. “Suppose you put $3,000 into an RRSP and get a $1,200 refund,” explains Ellen Roseman of The Toronto Star, “You’ve really put only $1,800 into your RRSP – since you’d have only $1,800 after taxes if you cashed in the $3,000 RRSP in the same tax bracket (40 per cent).” By investing the refund back into an RRSP, you will have $4,200 that will grow until you withdraw the funds at retirement, when you may be in a lower tax bracket.
You want to retire early.
PRO: Placing as much money as you can afford into your RRSPs is certainly one way to create a path towards early retirement. With Canadians living longer, and many companies cutting pension benefits, it’s a wise choice to consider the ways in which you can enhance your financial stability in the post-career part of your life.
CON: It’s not so easy to come up with large chunks of cash for such early-year contributions. A better option would be to make regular small payments over time. As Vincent Soucy of AGA Benefit Solutions explains, “to save enough for your retirement, you need a strong savings plan based on a regular RRSP contribution frequency. This makes budgeting much simpler. Indeed, contributing $50 every 2 weeks is much easier than contributing $1,300 at year end.”
You’re looking to buy a home.
PRO: If you’re in the market for a new home, you have the ability to withdraw up to $25,000 from your RRSP without interest or taxes, via the home buyer’s plan. You also have the ability to repay it over the course of 15 years. If you have a spouse, he/she can also take out the same amount from his/her RRSP to contribute to the purchase of your new home. Both spouses can take out $25,000 each.
CON: If you don’t repay least 1/15th of the borrowings back every year, that amount is then added to income and is taxable at your current tax bracket rate. It may be beneficial looking at alternate investments such as a Tax Free Savings Account (TFSA).
For more information on RRSP contributions, please don’t hesitate to contact Platinum Bookkeeping and Tax by calling 1-888-675-3528 or by visiting our Contact page and filling out our form!