Canada | Personal Finance

5 last-minute RRSP tips to help you meet the deadline

Have you been procrastinating, wondering whether—and how—to make a contribution for 2018? Here are some pointers that could help you make a decision.

A Facebook IconFacebook A Twitter IconTwitter A Linkedin IconLinkedin An Email IconEmail

young couple looking over their finances, using a laptop in their livingroomIf you and your spouse or common-law partner have very different income levels, you might also want to consider a spousal RRSP (Getty Images/PeopleImage)

As we come down to the wire for 2018 RRSP contributions (this year, it’s Friday, March 1), you still might be weighing your options, wondering whether to make the investment. To help you over the decision hurdle, here are a few pointers that should clear up any lingering questions you might have.

1. KNOW HOW MUCH YOU CAN CONTRIBUTE

Look at your 2017 notice of assessment: on the deduction limit statement, it will show your available contribution room. (If you can’t find your assessment, contact CRA.) 

In general, you can contribute up to 18 per cent of your prior year’s earned income, minus any employer pension plan or group RRSP contributions, plus any contribution room you have carried forward from previous years but haven’t yet used. But all is not lost if you can’t afford to maximize your contribution.   

“Most Canadians don’t,” says David Trahair, CPA, a financial trainer and author of several books, including The Procrastinator’s Guide to Retirement. “The key is to at least put something in to get you in the habit of saving for retirement.” [See Starting to save for retirement? Track your spending first]

2. CHECK YOUR CASH FLOW

It’s easy to get swept up in the general RRSP panic as the deadline approaches. But would you be better off waiting till next year? According to Trahair, it all comes down to available cash flow. 

“If you have the money, go ahead—especially if you are in a relatively high tax bracket and will therefore get a good refund.” If your earnings next year might be lower or you will need that money in the short term, consider putting your money in a Tax-free Savings Account (TFSA). [To decide whether it’s better to go for a TFSA, see Time to set the record straight about these 5 RRSP myths]

But what if you need to borrow to make a contribution? Trahair strongly advises against such a strategy. “That’s because the interest on the loan is not deductible and loan interest rates are quite a bit higher than they were a couple of years ago,” he says. “If you are going to pay almost 5 per cent in interest, you’ve got to earn almost 5 per cent in your RRSP to make it worthwhile over the long term. That is going to be very difficult to do these days.”

3. RESIST THE URGE TO SPLURGE

Let’s say you do have some money put aside. Should you use it to make an RRSP contribution or pay down debt? You can’t really lose either way, says Trahair. “But if you decide to blow the money on a trip instead, that is obviously not the optimal situation.”

Trahair adds that if you are on schedule to pay off the mortgage by retirement, if you have been making regular RRSP contributions and if you are doing fairly well with your RRSP, then you don’t need to change a thing—keep doing what you are doing and you’ll be fine. 

4. BRING YOUR SPOUSE OR COMMON-LAW PARTNER INTO THE PICTURE

With couples, it’s fine if you alternate contributions, says Trahair. “If you make a contribution this year and your spouse or common-law partner makes one the next year, that’s OK. It doesn’t have to be all or nothing,” he says. Trahair also points out that it’s best to have both of your RRSPs at about the same level when you retire. 

He explains: “You don’t want to have one of you with a massive RRSP and the other with one that is not very substantial, because most of the income will then go on one tax return, resulting in a higher household tax bill. That’s because you can only split up to 50 per cent of your eligible pension income when you turn your RRSP into a RRIF.” 

If you and your spouse or common-law partner have very different income levels, you might also want to consider a spousal RRSP. Here, the higher-income earner contributes relatively more to the spousal account, and gets a refund based on his or her income. But when the money is withdrawn, it is generally taxed on the lower-income spouse’s or common-law partner’s tax return.

5. MAKE YOUR CONTRIBUTIONS EASY 

If you have an RRSP in place, you might have already arranged to make your contribution via online transfer. But if you don’t yet have one, you’ll need to do the paperwork to open the account. Leave yourself plenty of time. Some institutions can handle it all online, but others require original signed documents, which takes longer.

Once you have an account, you might want to make life easier next year by setting up a pre-authorized transfer. For example, you can have a certain amount automatically transferred to your RRSP after you receive each paycheque. It doesn’t need to be a huge amount—even $50 will add up over time.

Whatever amount you decide to invest, you can congratulate yourself for having made that first big step on the retirement savings path. And you will definitely thank yourself when the time comes to use the funds for your golden years.

PREPARE FOR RETIREMENT

CPA Canada has a full suite of resources that can help with retirement planning, including Understanding RRSPs and TFSAs and The Procrastinator’s Guide to Retirement. To plan a financial literacy session in your community, see Planning for retirement.