Get answers to most commonly asked RRSP questions and find out if a contribution would be beneficial from a tax perspective.
We are at the start of new year 2021, and from a financial and tax perspective this means many Canadians have started contemplating on contributing to their RRSPs with the objective of lowering their tax liability. As thoughtful as this objective may be, it is a wise tax planning strategy to consider whether an RRSP contribution will in facts save taxes. Here we discuss the most commonly asked questions about RRSP and provide you insights on the related tax planning aspects.
What is an RRSP?
A registered retirement savings plan (RRSP) is a government-approved plan that allows Canadians to save and invest money primarily for use in retirement years. Contributions made to an RRSP are tax deductible, which lowers your tax liability or potentially even provides you a tax refund. Furthermore, all capital gains and dividends are tax sheltered within an RRSP as long as funds remain in the plan.
Who can benefit from an RRSP contribution?
As a means to lower tax payable, it is generally advised that a contribution be made to an RRSP. However, RRSP deduction is more beneficial to an individual who is in a higher marginal tax bracket. For example, a individual who makes more than $220,000 per year would be subject to a combined (federal and Ontario) marginal tax rate of 53.53% for the 2020 tax year. For this individual it makes good sense to contribute to an RRSP since the resulting deduction would allow them to reduce their taxable income and in turn overall tax payable. Furthermore, as is the case with most retirees, when this person retires, they would likely be in a lower marginal tax bracket. At that time, they would be pay less tax on their RRSP withdrawals!
On the other hand, a person in a lower marginal tax bracket (for example, someone making less than $45,000 a year and thus falling into the combined marginal tax bracket of 20.05% for 2020 tax year) would not benefit as much from an RRSP deduction. With the various other deductions and tax credits this person may be entitled to, they would already be in a tax refund situation.
This is not to say that lower income earners/families should forgo contributing to an RRSP altogether. There are some social benefits that low income earners/families might be entitled to, including Canada child benefit (CCB) and Ontario Trillium Benefit (OTB), because of making an RRSP contribution.
Proper tax planning is needed in order to determine if RRSP would indeed be advantageous to an individual or family as a whole.
What is my RRSP contribution limit?
Your RRSP contribution limit for 2020 is 18% of your 2019 (previous year) earned income or $27,230, whichever is less, plus any unused contribution room from previous year(s).
What is RRSP contribution deadline?
The last day to contribute to an RRSP and be able to claim the deduction on your 2020 tax return is March 1, 2021 (within first 60 days of the year).
Conclusion
It is a prudent strategy to start saving for your retirement early on as your money will have more time to grow. However, from a tax perspective individual and/or family's income levels need ta be taken into consideration.
Related links:
Tax implications: Pre-retirement RRSP withdrawal
Canada child benefit (CCB)
Ontario trillium benefit (OTB)
For professional advice, contact Alpha Accounting, Accounting & Tax Solutions.
