The clock is ticking on the March 3rd Registered Retirement Savings Plan (RRSP) deadline.
Across this great country Canadians are raiding their piggy banks and flipping seat cushions to save a few bucks on their 2013 taxes.
But despite dire warnings of retiring penniless, it’s not the end of the world if March 3rd comes and goes without a contribution.
The carry-forward rule
First, the deadline only applies to the 2013 calendar year. The Federal government always gives Canadians an extra two months to make a contribution before it’s time to file the previous year’s income tax return. That comes April 30, but we can worry about that later.
If you manage to make a contribution before the March 3rd deadline, that amount can be deducted from your 2013 taxable income. If your employer has been deducting income tax on your behalf throughout the year, the government will refund the taxable portion of that contribution. The amount refunded is equal to the amount you would have been taxed. In other words, if your top income bracket is 36 per cent, you save $36 for every $100 contributed.
If you contribute after March 3rd it can be deducted from your 2014 income. In fact, any missed contribution below the annual maximum allowable amount can be carried forward as long as you make contributions.
The annual contribution limit is currently 18 per cent of your previous year’s earned income or $23,820 - whichever is less. That means if you don’t contribute the maximum amount each year of your working life (and very few Canadians do) that shortfall accumulates.
You can find your total allowable contribution on your most recent notice of assessment received each year from the Canada Revenue Agency. It’s the notice you receive in response to your tax return, and the amount is listed right at the bottom.
Waiting could be more beneficial
If you wait until after the March 3rd deadline and make an RRSP contribution in 2014 or a future year, your rebate could be even bigger. If you had an off-year in 2013 and earned less than usual, you could be in a lower tax bracket and as a result receive a smaller rebate. If you expect to generate more income in the future, you will be in a higher tax bracket and the tax rebate will be bigger. That’s especially true for young people starting out in their careers or self employed people with incomes that vary from year to year.
It can also be beneficial to save your RRSP contributions for higher income years because you will be taxed on those contributions, and any gains they make, when you withdraw them in retirement. If you contribute when you are in a low tax bracket and withdraw in the same tax bracket, or higher, you’ve lost the biggest benefit of the RRSP.
For that reason it might be a good idea to hold off on contributing if your investments have grown beyond expectations. Eventually retirees are required to make minimal withdrawals. All that money could put you in a higher tax bracket and even present the risk of Ottawa clawing back some, or all, of your Old Age Security payments.
Contributing now could be detrimental
The finance industry puts a lot of pressure on Canadians to contribute to their RRSPs before the deadline because that’s how it makes money. The push to sell investment products is so strong it will even offer loans to meet the deadline.
Rushing into a decision could wind up putting you deeper in debt, making the wrong investment decision and paying more taxes.
Take a step back and calculate whether an RRSP contribution is the best move for you right now.
If the answer is no, look to 2014 and beyond. Talk to a financial advisor, set up regular contributions throughout the year and invest toward a life long goal.