Nobody likes deadlines, it’s true, but when it comes to RRSPs, there is one important day approaching that we recommend you prepare for: March 2, 2020 is the last day that RRSP holders can make contributions that will count toward the 2019 tax year. In this article, we’ll explain why you want to contribute before this date, but first, let’s talk about how much you can contribute.
Contribution Room
Your contribution room is the amount you are allowed to deposit into your RRSP. Knowing this amount is important because going over your limit and over-contributing can lead to being charged a tax penalty.
Contributions can be no more than 18% of your previous year’s income, with a maximum cap of $26, 500 for 2019 (The 2020 maximum is $27, 230). However, if you did not use all of your contribution room last year or years prior (i.e. you contributed less than 18% of your annual earned income), that room will carry over to the current year. In addition, any amount contributed to a pension plan will decrease the contribution room for your RRSP. Because of these varying factors, contribution room is different for each individual, and the best way to ensure you are within your limit is to refer to the Canada Revenue Agency. There are a few ways to find your contribution limit:
- The Notice of Assessment you received in April or May of 2019 (about three weeks after you filed your taxes) will have your contribution room, also called “deduction limit”, on line (A)
- By logging into your CRA online account, if you have one
- By calling CRA’s Tax Information Phone Service: 1- 800-267- 69999
- If the CRA has sent you a Form T1028, your deduction limit and any changes to it will be outlined here
So, now you know how much to contribute, let’s get into why contributing by the March 2 deadline matters.
1. You will receive a better tax return this year. The money deposited into your RRSP is deducted from your income when filing taxes. When it comes to taxes, lowering your income is a good thing because it means you receive more in your return, break even, or at the very least owe less, depending on your exact income and the province you live in. Since anything contributed up until March 2 is counted as part of the 2019 tax year, you will receive the tax benefits in your tax return this year, instead of having to wait until 2021. You’ll thank yourself when making summer travel plans, or better yet, stashing that money in an investing account and letting it grow.
2. The longer your money spends in your RRSP, the more it can grow. This is the principle behind compounding interest. If you are investing your RRSP (which we hope you are!), contributing earlier will mean you reap more rewards later on. Sure, waiting another month to contribute may not feel like it will matter that much, but we all know life is hectic. Something you plan to do in a month can easily slip through the cracks and go much longer without being addressed. Why not use the deadline as a reminder to get your money invested early and cross one more thing off your to-do list?
3. Spousal RRSPs can help both of you save money. Couples who hold spousal RRSPs can benefit by having the higher earner contribute to the other’s plan. This results in a lower taxable income for the higher earner and a boost in tax-deferred savings for their partner.
4. If you receive government benefits such as the Canada Child Benefit, you may be able to increase the amount you receive. The Canada Child Benefit, and many other government benefit plans, is based on family income. By contributing to RRSPs, you are lowering your income and thus potentially increasing benefits (depending on the particular stipulations of the government program), while adding to your retirement savings.
5. You’ll know how much you can contribute in the 2020 Financial Year. By finding your current deduction limit through the methods listed at the top of this article, you will have the number for your 2020 contribution room easily on hand (simply calculate 18% of your 2019 income, add any of the room you didn’t use in 2019, and subtract any pension contributions). This is great for when you are making personal budgets or figuring out how you want to divide your savings each month, as you’ll have a clear idea of how much to put aside for your RRSP on a regular basis.
Checking in on your RRSPs and topping them up is not only going to help you make the most of your tax refund and save for retirement, it will help you keep your financial goals on track and start this decade off with an investment that will serve you in decades to come.