2014 RRSP Deadline Fast Approaching
It’s that time of year again. RRSP season. Advertisers urge us to invest and save. The deadline for contributions to be counted on your 2014 income tax return for tax deduction purposes is March 2, 2015 however retirement planning is something we should consider all year long. Better late than never!
An RRSP is an investment registered with the Federal government to help us save for our retirement. The purpose of this investment is to leave it grow tax free until we require it when we retire. Whether we like it or not, each day we grow older and we cannot change this fact. But we can plan better for what is ultimately coming.
For most of us, there are many tax advantages to investing in RRSP’s.
Defer Taxes on Money Saved Today
Profits made on investments such as interest, dividend, capital gains are not immediately taxable to you as income. You do not pay income tax until the funds are withdrawn from the plan. The thought is that when you retire your tax bracket will be lower than when you are working. Therefore, you will pay less income tax on the surrender if you hold off withdrawing the funds until after you stop working.
You get an immediate tax receipt for the money contributed to the RRSP which can then be deducted from the taxable income on your tax return. This usually generates a tax refund for most tax payers. This refund can then be reinvested into the RRSP to grow your savings.
Timing Is Everything
Due to compounding interest, you earn interest on your interest. The earlier you start saving, the greater return to you in the long run. Setting up monthly contributions to your RRSP, no matter how nominal, makes sense over just one annual contribution. With the magic of compounding interest, your investment grows each month inside the plan.
Many Employers Match Contributions
Who would pass up free money? Many employers match RRSP contributions made by their employees in group plans through work. Why not participate? If it’s immediately deducted from your pay check you won’t miss what you never had.
Borrow from Your RRSP
You can “borrow” from your RRSP for purposes such as buying your first home (Home Buyers Plan) or funding your education (Lifelong Learning Plan). The government will require you to repay the monies you borrowed from your own plan forcing you to save again.
But RRSP’s are not for everyone. There are also disadvantages too.
Taxed on Withdrawals
You will be taxed on the funds you withdraw. If you require these funds due to an emergency and you are in a high tax bracket, you will be a substantial amount of income tax and may even owe income tax at years end.
Can’t Last Forever
RRSP’s must be terminated by age 71 and converted to a LIF (Life Income Fund). Then annually you will receive income by law and taxed at whatever tax bracket you are in at that time.
Limits to Contributions
You are only allowed to contribute a certain RRSP threshold each year based on your previous year’s income and prior contributions.
When considering retirement consider at a minimum three sources of income: government assistance such as CPP, OAS; employer provided benefits such as company pensions and self- directed savings. It’s always a good idea to depend on your own resources as much as possible instead of putting all our eggs into the government assistance basket. With rising living costs, even the Easter Bunny needs a big basket to retire on nowadays.