RRSP season is here. You have until March 1, 2011 to make your contributions for the 2010 contribution year. In most cases, the RRSP tax advantages make it the best tool for long-term retirement savings. If you’re over 18, employed or self-employed, you should contribute to an RRSP.
Annually, you’re allowed to contribute up to 18 per cent of your income (to a maximum of $22,000 for year 2010). You receive a tax deduction in exchange for your contribution. Contributions must be made by March 1 for a tax deduction for the previous year.
Funds within the RRSP grow tax-free until withdrawal, at which time you pay taxes at the highest marginal tax rate. Remember though, you’ll be retired and making less than when you were working.
The major benefit is that you defer paying taxes until your retirement, which is very useful when you’re starting out in your career, purchasing your first home, growing your family, and travelling. Tax deferral allows you to maximize your savings opportunities now because less of your income is going to taxes. You can select almost any type of investment to put in your RRSP—stocks, bonds, mutual funds, etc.
If you over contribute, more than $2,000 beyond your limit, Canada Revenue Agency (CRA) will penalize you at a one per cent tax per month, so stick to the limits. The maximum limits are indexed for inflation each year. Check Stats Canada for annual updates (www.statcan.gc.ca) or Canada Revenue Agency (www.cra-arc.gc.ca) to access your personal limit.
If you don’t use the full amount of contribution room within your RRSP, you can carry it forward indefinitely. So if you can’t afford to maximize your contributions this year, you can try again next year or the year after.
Set up an RRSP account at your local bank or through your employer. Employers often match your contributions – free money!
Start contributing regularly on payday. Then increase your contributions annually until you reach your maximum limits. Money grows exponentially – more money grows faster than less money through the power of compounded interest and reinvested returns. So, the more you save, the more you’ll potentially earn. Plus, you’ll receive a greater tax deduction, which can result in a tax return.
Unemployment can get in the way of contributing to an RRSP, but once you’re working again, pick up where you left off and contribute regularly to your plan.