Your deadline for Registered Retirement Savings Plan (RRSP) contributions is March 1, 2021. By carefully leveraging your options, you can reap the most tax credits. Consider these five points as the deadline approaches.
1. How much you can contribute
The more you contribute to your RRSP, the greater your tax credit. Your annual contribution limit is 18% of your pre-tax earned income, up to a limit of $27,230 for 2020. Add to this any unused contribution room from previous years. Your latest Notice of Assessment will state your contribution limit. If you have a pension plan, any adjustments will reduce this limit. Pooled pension plan contributions have the same effect.
2. Take all your earnings into account
In general terms, earned income is money received through employment, self-employed income or income from a rental property. It also includes tips as well as alimony payments. Business income is not included in the RRSP contribution limit calculation.
3. Consider your spouse
By creating a spousal RRSP, you can lower your joint tax burden by reducing the higher earning partner’s taxable income. In retirement, when this money is withdrawn, the lower income partner will also pay a lower tax rate.
4. Keep it under the limit
If you over-contribute to your RRSP by more than $2,000, you will face a tax penalty of 1% per month on the excess, and this amount is not tax deductible. Check your contribution room on your latest Notice of Assessment to ensure you stay within this limit.
Do you need to invest more for your future? Ask your Financial Advisor for other great ways to enhance your retirement planning.
5. Plan your contributions
If you can’t contribute the maximum to your RRSP this year, the shortfall continues to accumulate. As your income increases, you can do some aggressive saving and use the contribution shortfall to add more money into your RRSP.
Here’s an example: Your contribution room is $27,230 for 2020. In 2019, you contributed $10,000 while the maximum limit was $26,500. Resulting in a carry-over of $16,500. This tax season, you can make total RRSP contributions of $43,730 for 2020.
Plan in advance how best to use this shortfall. A smart savings strategy and monthly payments will ensure your RRSP contributions can reap the maximum tax savings for you next year.
Get busy planning the best way to leverage your RRSP contributions.
* Segregated funds and insurance provided through Carte Risk Management Inc.