This year’s RRSP contribution deadline of March 2nd is fast approaching… and with it comes the decision of how much to put away. At this time of year you’re bombarded with the same message: “You should always maximize your RRSP.” But is that more myth than good advice?
As a long-time active money Portfolio Manager, I’d say it depends on your circumstances. If you are in the highest taxable income bracket, yes you should always maximize your RRSP. However, there are other options to keep in mind.
What Is An RRSP?
A Registered Retirement Savings Plan (RRSP) is a tax deferral mechanism designed to help you save for retirement. Within your RRSP you can hold investments such as: cash, Guaranteed Investment Certificates (GICs), Mutual Funds, Exchange Traded Funds (ETFs), bonds and individual stocks (equities). The contributions that you make to this account are tax deductible and any investment gains that you earn on your contributions is tax deferred until you withdraw money from your account.
When Should I Maximize My RRSP Contributions?
If you’re in the highest marginal tax rate, you have the most to gain by maximizing your RRSP contribution. It will lower your taxable income the most and may even bump you into a lower tax bracket, which will reduce the amount of income tax you’ll have to pay. If you haven’t used your entire RRSP contribution limit for the years 1991 to 2013, you can carry forward unused amounts to 2014.
When Should I Not Max Out My RRSP?
If you’re in a lower tax bracket you may be better off contributing to a Tax-Free Savings Account (TFSA) first. You can use up the $5,500 annual TFSA contribution room for 2015 (as well as any unused contribution room from previous years).
As your income increases, you can look to put more money away in your RRSP. If you have young children, you may be saving money in a Registered Education Savings Plan (RESP) as well as contributing to an RRSP.
Everything You Need To Know About RRSP Deadlines & Limits.
- Contribution deadline: March 2, 2015.
- 2014 Contribution limit: 18% of your gross income, up to a maximum of $24,270.
- How to find your limit: Check Line A of your Notice of Assessment from Canada Revenue Agency, visit www.cra-arc.gc.ca or call 1-800-267-6999.
RRSP Already Maxed Out?
If you’ve already maxed out your RRSP contribution for this year and still have money to invest, consider taking advantage of other investment vehicles, such as a:
- TFSA
- RESP
- Non-registered investment account
- Or investing in a universal life insurance contract