This Tax Season, Consider a Last-Minute Contribution to Your RRSP
While it’s never a bad time to think about contributing to your Registered Retirement Savings Plan (RRSP), there’s no time like the present. Why? Because investing in an RRSP is one of the simplest ways to get the most out of your tax return.
If you didn’t get the chance to set up monthly contributions this past year, placing a last-minute lump sum of money into an RRSP is not only a win for your tomorrow – RRSP has the word ”retirement” in its name for a reason – but it can prove quite valuable when tax season rolls around.
For example, if you know you’re going to owe money, an RRSP contribution can help reduce the amount you’ll have to hand over this year. And if you typically get money back, depositing money into your RRSP at some point during the tax year (in this case, the last nine months of 2022 + the first three months of 2023), can mean getting more back than anticipated. Just make sure to make a final deposit before the March 1st deadline.
While a one-time bulk contribution may not be a practical option for everyone, it may be a wise path to take if you have some extra money to invest. And if smaller contributions over a longer period of time work better for your budget, why not set up monthly contributions (via direct deposit) for the 2023 tax season? You’ll thank yourself later.
What about TFSAs?
While a Tax-Free Savings Account (TFSA) is not tax-deductible (i.e., it won’t affect money owed or received when filing your personal income taxes), you will never be taxed on money earned (unlike an RRSP). So if you find yourself in a position where you’ve already maximized your RRSP contributions, a TFSA is a way to save additional money and enjoy the benefits of tax-free growth and withdrawals. Just remember that a TFSA is not specifically designed as a retirement savings account, but still nicely complements an RRSP.
RRSP vs TFSA: What’s the difference?
To make it simple, we’ve created a Tax Planning Summary that highlights a few important differences between these two savings options.
|Annual Contribution limit||18% of previous year’s earned income, (maximum limits apply), less pension adjustments||$6,500 PLUS amounts withdrawn in previous years|
|Unused contribution room||Carried forward||Carried forward (since 2009)|
|Withdrawals||Taxable: affects federal income-tested government benefits such as Old Age Security|
Contribution room is lost for amounts you withdraw
|Tax-free: does not affect federal income-tested government benefits such as Old Age Security
Added to contribution room in future years
|Primary purpose||Retirement savings||Saving for any purpose|
|Plan maturity||End of year when you turn 71||None; no maximum age limit on contributions|
|Spousal plan||You can contribute directly to a spousal RRSP||You can give your spouse money to contribute to their TFSA|
*An individual must have employment or business income to earn contribution room; some financial institutions may require the individual to be at the age of majority
If you’re still wondering which of these two very common savings tools is best for your unique situation, speak with the experts. Book a no-obligation call with an advisor at Serenia Life Financial to review your budget, financial goals, and more. Get started today!
A different way to invest
Want to reap the benefits of a last-minute contribution towards your RRSP and boost your savings while you’re at it? Consider investing in an Guaranteed Interest Annuity (GIA) – it’s like a GIC with a twist!
Subscribe to keep updated with the latest news.