The deadline to make an RRSP contribution for the tax year of 2022 is March 1, 2023. Please see below for some insight on RRSPs that should help you become more informed and help you formulate your RRSP contribution strategy for this year and going forward:
Tax Deduction: RRSP contributions are tax deductible, meaning for every dollar you contribute to your RRSP, your taxable income is reduced by one dollar. This will in turn reduce the amount of tax you owe, while at the same time helping you prepare for retirement. With a higher marginal tax rate, an individual benefits from a higher savings rate based on the amount of tax they would pay on that extra dollar of income.
Annual Contribution Limit: Your annual RRSP contribution limit is the lower amount of 18% of your earned income from the previous year (2022) or $29,210. This amount increases each year, and you can continue to make RRSP contributions until December 31st of the calendar year you turn 71.
Unused Contributions: Should you not contribute up to your RRSP contribution limit, the difference can be carried forward and added to your contribution room for the following year. An increase in salary over the years will also translate to a higher marginal tax rate, and higher cash flows to be able to take advantage of this additional space when your marginal tax rate and savings opportunities are higher.
Spousal RRSP: This account enables the higher income earning spouse to make an RRSP contribution to the lower income earning spouse. This allows the higher earning spouse to benefit from the tax deduction of the contribution, while the lower income earning spouse will benefit from withdrawing the funds at a lower marginal tax rate in retirement. This is a good example of income splitting.
Withdrawals: By the end of the calendar year of which you turn 72, your RRSP accounts will automatically be transitioned into RRIF accounts (“Registered Retirement Income Funds”), and you will have minimum amounts required to be withdrawn annually. The minimum amount you are required to withdraw is a function of your age and the balance of your RRIFs at the end of the previous year. As long as the funds are not in a locked-in plan, you can withdraw them at any time. In most situations, a withdrawal prior to converting your RRSPs to RRIFs, will result in a withholding tax on your withdrawal, and the amount will be added to your taxable income for the year in which it is withdrawn. This strategy can be advantageous during a low-income period, perhaps in between retirement and prior to when you begin receiving your pension, where you would be able to withdraw a portion of your RRSP account and pay tax at a lower marginal tax rate. Please see below for two programs that allow an individual to withdraw from their RRSP account without it being included in your taxable income:
Consider speaking to your financial advisor and/or accountant to help establish your RRSP contribution strategy. Also consider talking to your financial advisor about a wealth analysis, a free resource offered to all Echelon clients, to help ascertain and realize your financial goals.
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