The decorations have been stored away, distant relatives have come and gone and your savings are a little more worse for wear. So, likely the last thing on your mind is how much you should be contributing to your RRSPs (Registered Retirement Savings Plans).
In addition to New Year’s resolutions, January brings with it the start of RRSP season, a time when most Canadians make large lump-sum contributions to their RRSP accounts in hopes it will reduce their tax bill or produce a tax refund. This can sometimes come with pressures that commonly result in unwanted loans, lines of credit or no contributions made at all.
Don’t get us wrong, RRSP season is a great reminder and motivator to contribute to your savings each year but it shouldn’t be the sole reason to do so, especially if it means emptying your short-term savings or taking out unnecessary loans when it’s not feasible to do so.
This month, we’re taking a page from Motive’s Assistant Manager, Pat Neitsch, to get her advice on the best RRSP strategies to adopt this year in hopes it will ease your stress in the coming months and, more importantly, years.
An RRSP, put simply, is a savings or investing account with certain tax-saving characteristics. RRSP accounts are used to help you reap savings over an extended period of time and are often contributed to during your prime earning years.
One of the main benefits of an RRSP account — and why RRSP season occurs when it does — is the ability to use your contributions to defer taxes. As a result, the total value of your savings will grow more quickly because by the time you withdraw from your RRSPs — with age 71 being the latest you’re allowed to — you’ll be in a lower tax bracket, which means you’ll incur more tax savings than if you were to withdraw money now.
When asked when to set up an RRSP account and how often to contribute to one, Pat couldn’t emphasize enough,“the sooner the better.” As far as contributions are concerned, Pat recommends small monthly contributions, starting as low as $25. “It’s mind blowing how much money you can put away over a 10-to 15-year time span, as even small contributions can make a big difference,” she emphasizes. If you aren’t able to contribute as much as you hope this year, Pat suggests creating a savings plan for the coming year that allows you to contribute a small amount once or twice a month. That way, by the time next year rolls around, you can relax.
The benefit of monthly contributions also significantly outweighs the cost of a potential tax break, especially if you’re resorting to borrowing money to set up an RRSP. With set contributions all year round, there’s no need for you to panic come January to make a lump-sum contribution. Your investment returns will also be tax sheltered. And the best part is your savings will become a priority throughout the entire year, which is what most of us are striving towards.
What shouldn’t you do with an RRSP account? “Don’t use it as a casual savings account,” Pat cautions. When you contribute to an RRSP, you need to set it and forget it. “Sometimes people think they can withdraw from their RRSP to buy something of scale, but when you do that, the government takes a significant amount of tax right off the top of your earnings and only aggregates it further based on how much you’re withdrawing,” explains Pat. The only exceptions are certain government programs. For example, under the federal Home Buyers’ Plan, you can withdraw up to $25,000 from your RRSPs without paying tax, but you have to repay the full amount within 15 years. A secondary example would be if you want to withdraw from your RRSPs to finance your education. In that instance, you can only take out $10,000 per year and, once again, the money has to be paid back. Outside of these programs, if you try to withdraw money from your RRSP you’ll face a steep withholding tax, which could be as much as 30 per cent of the money you withdraw.
If you already have an RRSP and you’re looking to contribute a larger sum this year, Pat suggests checking your Notice of Assessment form the government sent you after processing your last tax return. And as always, meet with your financial advisor to discuss what options are best for you. This year, the deadline for making an RRSP contribution for the 2017 tax year is March 1, 2018, so plan any meetings and discussions ahead of time to ensure you’re not missing out.
If you don’t have an RRSP, or you’re just not able to make a large contribution this year, don’t stress. You still have three months to contribute and set up monthly payments to get a head start for next year’s tax return. Motive Financial provides competitive RRSP GIC savings strategies and rates that are designed to meet your specific needs and help you to save for retirement and receive tax benefits now.
Pat reiterates Motive’s aim of making saving money easier for you. They understand the benefits of starting small and growing your savings over time while providing better rates and easy to use products — all accessible online or by phone.