The Registered Retirement Savings Plan (RRSP) is probably one of the most commonly known and used Canadian savings plans out there. Individuals, spouses or common-law partners may contribute to the plan while compounded earnings remain exempt from tax so long as they remain within the plan. However, when you withdraw funds, you typically must pay tax on the plan’s payments.
Sounds simple enough, but how do you know when it’s in your best interest to maximize your RRSP contributions? There are cases where continuing to maximize your contributions can drastically increase the tax owing on your estate, but there are also times in life where maxing those contributions is a good idea. While it’s always best to talk to a trusted advisor, there a few scenarios where a max contribution can pay off.
You’ve earned enough to receive a higher refund
In those years where you’ve reached a higher earning bracket, you’ll also receive a higher income tax refund. During these years, it’s a great idea to maximize your RRSP contribution in order to pay less tax, but also to roll that return back into your RRSP so it can continue to grow tax-free. It’s a great way to ensure you have more money for your retirement. At the same time, you’ll be using funds that are easier to accumulate in the form of the refund than those built up by earning or saving.
When time is on your side
The sooner you start your retirement savings through your RRSP, the bigger your accumulated savings will be. In addition, an early start means you’ll more quickly realize the benefits in tax deferral, allowing you to focus more on accumulation at this stage. If you’re at that earlier stage in your retirement savings plan, and provided you earn over $40,000 per year, the benefits in the RRSP’s long-term tax-free growth at maximum contribution are more likely to benefit you in both the short and long-term.
You have more than just income to save
The RRSP holds more than just your earnings. You can also include stocks, mutual funds, bonds, guaranteed investment certificates and more. In all of these cases, your assets grow tax-deferred until you withdraw them. Should you be maximizing your RRSP contribution now, you can realize tax savings for the time-being while it’s more advantageous to your wealth accumulation strategy and take care of them later on when you’ve already grown your wealth.
Deciding how to best leverage your RRSP can be complex and depend upon a number of considerations. When you’re unsure, don’t take chances with your money or your future. It’s likely time to reach out to a trusted professional advisor.
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