Each year, millions of Canadians contribute to their RRSP. But not all of them are crystal-clear on what their RRSP is for or why it’s so beneficial to start saving early.
Is retirement planning on your mind? It likely is for many Canadians, given that the RRSP contribution deadline for 2024 is February 29.
But what does that mean for you?
“There’s never a bad time to invest if you have a long time horizon,” says Trenton Mochnacz, Senior Financial Advisor at Cambrian Credit Union and Credential Securities.
Throughout this article, we’ll be sharing advice from Trenton about how your RRSP can help fund your retirement. Here’s what you need to know about RRSP contributions in 2023:
Let’s start with the basics. First, what is an RRSP?
Registered retirement savings plans were created in 1957. They’re a long-term savings plan that’s registered with the Canadian government.
When you contribute to an RRSP, you don’t pay taxes on those contributions during that year. Instead, you pay taxes when you withdraw the money.
Depending on how much income you generate, your personal income tax rate will vary. This is called a tax bracket; essentially, the more income you generate, the more you’ll pay in taxes.
One way to lower your taxable income (and reduce the tax you pay) is by contributing to your RRSP.
If you choose to hold investments in your RRSP, those investments can generate income. An RRSP is tax-deferred, which means you don’t pay taxes on any income generated by your investments (until you withdraw the money).
For more information on RRSPs, read our blog on The Basics of RRSP Investing.
Forgot to contribute to your RRSP in 2022?
Don’t worry: For the first 60 days of the following year, your RRSP contributions will count for the previous year.
Up until March 1, 2023, you can make RRSP contributions that will be deducted from your 2022 income.
Why might someone choose to do this? As we mentioned earlier, RRSP contributions lower your taxable income for the year.
When you contribute to your RRSP, those contributions won’t be added to your personal income. This can put you in a lower tax bracket. And by the time you retire and withdraw that money, you’ll be in an even lower tax bracket. The result? You’ll pay less in taxes.
Here’s an example:
Let’s say that you live in Winnipeg, Manitoba, and your total personal income in 2022 was $51,000. When you combine federal and provincial taxes, your income is taxed at 33.25%.
But what if you contribute $5,000 to your RRSP?
You would reduce your taxable income to $46,000 for 2022. Now that you’re in a lower tax bracket, your tax rate would drop to 27.75%.
Not only are you saving money for your retirement, but you’re paying less income tax overall. In other words, more of your money stays in your pocket.
To see how much you can save, try the NEI RRSP Tax Savings Calculator.
Any RRSP contributions made after March 1, 2023 will be counted towards your 2023 taxable income. If you want to lower your tax bracket for 2022, now’s the time to take action!
Many people think that RRSPs and investments are the same. This is a common misconception.
RRSPs, by themselves, are not investment products.
They’re a type of savings account that you can put investments in.
“RRSPs are the vehicle, and investments are what you put inside of that vehicle. Any gains you earn on that RRSP are tax-sheltered until you draw them out, with the exception of the Lifelong Learning Plan or the Home Buyers’ Plan,” says Trenton.
Why do so many people choose to invest using RRSPs?
Because a retirement fund is something you won’t withdraw for many years. That gives you a lot of time to weather the ups and downs of the market before you withdraw the money.
Some of the investment products you can place in your RRSP include:
Which type of investment product is right for you? That’s something you can discuss with one of our Financial Advisors at Credential Securities.
“Investments are individual; there’s no one size that fits all. Everyone’s definition of risk is different,” says Trenton. “A person’s risk tolerance varies depending on their individual personal and financial circumstances, in addition to the stage of life they’re at.”
“Our Financial Advisors use tools that allow us to fine-tune how someone would invest based on their risk tolerance. We create profiles for what would be an acceptable level of risk and asset allocation for that person.”
To learn more, book a meeting with one of our Financial Advisors today.
You’re ready to take advantage of your RRSP—but first, you want to make sure you don’t overcontribute to it. If you do, the Canada Revenue Agency (CRA) could charge you a penalty.
Unlike TFSAs, RRSP contribution limits are different for everyone. Your limit will be whichever of these numbers is lower:
What if you don’t use all of your RRSP contributions for the year? In that case, you can carry the unused contributions forward to the next year. You can find your exact contribution room for the year on your Notice of Assessment from the CRA.
Did you know? You can contribute to an RRSP this year, but wait until a future year to deduct it from your income.
“If you know that your income is going to increase in the future, it may make more sense to deduct your RRSP contributions once you cross to the upper limits of personal income tax brackets,” says Trenton.
You still need to report your contributions to the CRA. After that, you’ll get a notice of your Unused RRSP Contribution Room from the government.
Before you contribute to an RRSP, we recommend that you meet with a Cambrian Financial Advisor. Our advisors can help you strategically contribute to your RRSP to maximize your retirement fund and minimize your taxable income.
If you hold investment products in your RRSP, you can capitalize on the power of compounding interest.
Your investments can generate interest over time. Then, you can reinvest that interest to generate even more income. Essentially, your investment gains can generate interest of their own. That means exponential growth.
The result? Even more savings.
Compounding interest is why it pays to start saving early.
Final takeaways? Trenton says, “Make sure that you have a retirement plan, make sure you check in on your retirement plan, and make sure you have someone that can help you along the way.”
Want to make an RRSP contribution before the deadline? Maybe you want to explore your investment options. If you’re ready to start retirement planning, our Cambrian Wealth Advisors would be happy to help.
You can meet with us via a video appointment, phone call, or in person. To book a meeting, contact us today.
Disclaimers
*Mutual funds and other securities are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc.
*Unless otherwise stated, mutual funds, other securities and cash balances are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer that insures deposits in credit unions. Mutual funds and other securities are not guaranteed, their values change frequently and past performance may not be repeated.
*The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This article is provided as a general source of information and should not be considered personal tax or investment advice or a solicitation to buy or sell any mutual funds and other securities.
*NEI Investments is a registered trademark of Northwest & Ethical Investments L.P. (“NEI LP”). Northwest & Ethical Investments Inc. is the general partner of NEI LP and a wholly-owned subsidiary of Aviso Wealth Inc. (“Aviso”). Aviso is the sole limited partner of the NEI LP. Aviso is a wholly-owned subsidiary of Aviso Wealth LP, which in turn is owned 50% by Desjardins Financial Holding Inc. and 50% by a limited partnership owned by the five Provincial Credit Union Centrals and the CUMIS Group Limited.
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