Getting the Most Out of RSP Season

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Why It Helps to Hit the Deadline

RSP’s are an often overlooked financial tool, but they offer great benefit to those who use it properly. Learn why it helps to put in the right amount before the annual tax deadline each year—not just for retirement purposes, but for today.

RSP stands for Retirement Savings Plan, and is an umbrella term for financial products that you can use to fund your golden years. RSPs, in other words, are tools for long-term financial planning and retirement savings.

Importantly, however, not all RSPs are created equal. Here are some of the key types of RSPs that you should consider investing in for your future:

RRSPs

The most popular type of RSP in Canada is the RRSP, or Registered Retirement Savings Plan. The RRSP is a type of investment account that gives you tax deductions and allows your investments to grow tax-deferred. Let’s break that down a bit.

When you contribute to your RRSP in any given tax year, you get to deduct that amount from your declared income, meaning you pay less on income tax for that year. Specifically, an RSSP allows you to contribute up to 18% of your previous year’s earned income up to an annual maximum of $27,830 (for 2021), plus any rollover from previous years that you haven’t used.

The money you deposit into an RRSP isn’t tax-free, mind you—it’s simply tax-deferred, meaning that when you eventually do withdraw from that investment (usually during retirement), you have to pay tax on it then. The idea, however, is that you will usually be in a lower income bracket at that time (since you won’t be earning employment income, unlike in the present), so you pay less income tax overall. Which is great.

Plus, your RRSP can be put towards investments, so it gets to grow tax-deferred over the years and decades to build up a proper retirement fund.

RPPs

RPPs are Registered Pension Plans that employers sometimes offer to their teams. RRPs come in two forms: Defined Benefit Plans and Defined Contribution Plans.

Defined Benefit Plans pay the employee a fixed amount upon retirement. That amount is calculated using a formula that takes into consideration factors like years of service and earning history, and may be indexed for cost of living increases.

Defined Contribution Plans, by contrast, fix the amount the employee must pay into the plan, and pay out a pension based on those contributions as well as some contribution matching from the employer.

The Deadline for RRSP Contributions

Because it’s tax deductible, the only retirement plan that has a firm contribution deadline is the RRSP, which is March 1st, 2022 for the tax year of 2021. If you fail to contribute before this deadline, you will not be able to use that amount to reduce your tax liability for that year. Not only is reducing taxable income always a good thing—especially in Canada, where progressive income tax means that you’re taxed at a higher rate the more you earn—you also want to invest your money as soon as possible so that you can start generating compound interest.

To find out how much you should put into your RRSP as a tax-deductible contribution, schedule a consultation with one of our financial advisors at the beginning of the year (before March 1). They can help advise you on what the best strategy is.

Getting Funding through RRSP Loans

If you’re in a situation where you may not have the cash to make your contributions before the deadline, you can still get the money through what is called an RRSP loan. This is a loan you can get and deposit the money into your RRSP to make sure you take advantage of all of your contribution room. This allows you to get a bigger tax return and make money from compound interest faster than if you had to save up the money on your own.

One form of an RRSP loan, for instance, is to refinance your mortgage. By leveraging the equity in your home at a low interest rate, you can make larger RRSP contributions and build that nest egg you’ve been dreaming of.

Conclusion

Retirement Saving Plans (RSPs) are investment accounts that help you prepare for your future and/or that of a dependent. They all offer some type of tax benefit such as the money growing tax-deferred or tax-free. This allows your money to grow much quicker than if you put it in a taxable, “non-registered” account, and can make a big difference in the value of your account by the time you retire and start taking money out.

The most popular type of RSP is the RRSP, which not only allows your money to grow tax-deferred but also reduces your tax liability for the year. The deadline to add money to the RRSP is March 1, and failure to meet this deadline means you have to wait until the next year to use your contributions to lower your tax liability.

If you don’t have the money to max out your RRSP for the year, you can get an RRSP loan, which will allow you to max out your contributions and repay the principal at a later date.

Here’s to the golden years.

To learn more about how to plan your future retirement while minimizing tax liability today, get in touch with one of our expert advisors and we’d be delighted to help.

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