Tips on maximizing your RRSP contributions: TRSM expert
Saving enough money to retire comfortably is critical but how can you start saving while juggling a mortgage, credit card debt and other factors? When is a good time to start and how much should you put away? With the deadline to contribute to your RRSPs for the 2016 tax return just a few weeks away, accounting and finance professor Laleh Samarbakhsh, Ted Rogers School of Management, offers these tips to help you decide if RRSPs are the right retirement saving and investment tool for you:
1. What is retirement planning? Am I too young for it?
You are never too young to start planning for retirement. In fact, the earlier you start saving, the more time your funds will have to grow and accumulate interest. First, ask yourself the following questions: How much have you got now? How much will you need at retirement? Finally, how much money will you have to save during your remaining working years? Next, you need to set goals and budgets. You should manage tax, risk, investments, and at times even debt to create a solid retirement savings plan.
2. What is RRSP? How can I set up this account?
A Registered Retirement Savings Plan (RRSP) is one of the most popular methods Canadians use for their retirement. It is an account registered with the Canadian government that allows individuals to defer their income tax-free until they retire. In Canada, you can set up an RRSP through a financial institution such as a bank, credit union, trust, or insurance company. An RRSP account can hold many different types of investments including mutual funds, stocks, bonds and GICs. To determine what investments you would choose once you’ve opened an RRSP, you can either work with a financial advisor or do it yourself via a self-directed RRSP (external link) .
3. What are the RRSP contribution rules and deadline?
The amount you can contribute for a given tax year, also called your RRSP deduction limit, can be found on last year’s Notice of Assessment, and equals 18 per cent of your earned income for that year, up to a maximum of $25,370 for 2016.The maximum dollar amount of RRSP contribution for each year changes in order to correct for inflation. Note that your deduction limit may be more if you did not use your entire RRSP deduction limit for the years 1991 to present. Over your lifetime, you can contribute to your RRSP until Dec. 31stof the year you turn 71. The deadline for RRSP contribution for the 2016 tax year is March 1, 2017.
4. How do RRSP contributions affect my taxes?
An RRSP contribution has various tax advantages. Here are the top four:
· Your contribution (within the maximum limit) is tax-deductible, which means you reduce your taxable income. This becomes a tax credit for you.
· Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan. However, you generally have to pay taxes when you cash in, make withdrawals, or receive payments from your RRSP.
· You can take advantage of early withdrawals without any penalty when investing in education or full-time training for your or your spouse through the federal government’s Lifelong Learning Plan (external link) . This can be additionally helpful at times of temporary unemployment or switching jobs, when RRSP can be used as an emergency fund.
5. How can my spouse or common-law partner and I maximize our RRSP benefits?
Setting up a spousal RRSP is a good idea if one spouse or partner has a higher income. He or she can contribute to the lower-earning spouse’s RRSP but still claim that amount on his or her return to lower the taxable income. However, the total amount that contributed towards your spouse or common-in-law partner’s RRSP cannot exceed your RRSP deduction limit.
In addition, if you cannot contribute to your RRSP because of your age limit, you can still contribute to your spouse's or common-law partner's RRSP until the end of the year he or she turns 71.
6. We just bought a house and are paying mortgage. Is contributing to RRSP still a good idea?
In general, paying off your mortgage before contributing to your RRSP is wise.
However, the answer is not quite straightforward and depends on each situation. It's usually best to find a balance between paying your mortgage and contributing to your RRSP, even when RRSP returns are lower than mortgage interest rates.
Consider these scenarios:
· If you’re not a home-owner yet, make substantial contributions to your RRSP before buying your first property. The RRSP investment that you started early could actually help you become a homeowner more quickly through the federal government’s Home Buyers' Plan (external link) , which allows you to withdraw from your RRSP without penalty to buy or build your first property up to $25,000 in a calendar year.
· Whether you should pay down your mortgage or contribute to an RRSP also depends on your age. If you're not retiring in near future, the compound interest in a tax savings of the RRSP is more advantageous than a faster mortgage pay-off. If your retirement is not far away, pay your mortgage faster to reduce your ongoing fixed costs for the next few years.
· If you are taxed at a fairly high rate, making RRSP contributions would be better than any topping up mortgage payments because of the previously explained tax savings. Bonus tip: you can use the tax return from your RRSP contribution to pay down your mortgage principal.
· If you are dealing with unsecured (not asset-backed) debt such as credit card, you should work with a financial advisor to create a financial plan to pay off all your credit cards, and then make RRSP contributions.
7. Should I contribute to an RRSP or TFSA?
Since RRSPs are tax-deferred savings, it makes sense to maximize your contribution during your peak earning years when your income falls in a higher tax bracket.
However, an alternative tax-free investment that is becoming more popular is the Tax-Free Savings Account (TFSA). TFSA was introduced in 2009 (after the financial crisis) and is open to all Canadians of 18 years and older. Any return on the investments made through TFSAs are tax-free and withdrawals can be made at any time without any penalty.
It is important to note that TFSA contributions are not tax-deductible. If your income for the year falls in a higher income bracket, maximizing your RRSP contributions makes sense. However, if you need an additional investment account, or if you are currently in a comparatively low income tax bracket, and/or prefer the withdrawal flexibility with no penalty, TFSA is a good option.
EXPERT AVAILABLE FOR INTERVIEWS:
Laleh Samarbakhsh
Assistant Professor
School of Accounting & Finance |Ted Rogers School of Management
Expertise: Personal finance, investments
Bio: http://experts.ryerson.ca/laleh-samarbakhsh
Office: 416-979-5000 x 6745
lsamarbakhsh@torontomu.ca
* Fluent in French

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