RRSP Basics: It’s RRSP Time again

RRSP season is here again!  Every year the first 60 days of the year marks an annual financial ritual where Canadians can buy RRSPs and use the contribution as a tax deduction against their previous years tax return.

How much can you contribute to your RRSPs?

Basically, there is a formula to determining your RRSP contribution limit which goes like this: 18% of your previous year’s earned income less your previous year’s pension adjustment to an annual maximum.  The annual maximums have changed every year:

  • 2002 – $13,500
  • 2003 – $14,500
  • 2004 – $15,500
  • 2005 – $16,500
  • 2006 – $18,000
  • 2007 – $19,000
  • 2008 – $20,000
  • 2009 – $21,000
  • 2010 – $22,000
  • 2011 – $22,450
  • 2012 – $22,970

Here’s a article I wrote giving more details on how much you can contribute to a RRSP

Deadline to receive a tax deduction

The deadline for a RRSP tax contribution is always 60 days after the end of the previous year to be eligible for a deduction for the 2011 tax year. This year marks a leap year so the deadline is February 29, 2012. Consult with your financial institutions about how they are able to accommodate deadlines.

Contributions made in the first 60 days of the year can be applied against the previous taxation year or in any subsequent year.

If you are turning 71, this is the last year in which you may contribute to your RRSP. You must convert your RRSP by December 31 in the year you turn 71.

Does an RRSP make sense for you?

This year, there seems to be more negative sentiments towards RRSPs than ever.  So many people are suggesting the new Tax Free Savings Accounts (TFSA) are better than the RRSP.  Probably one of my biggest disappointments is how many people don’t really understand the merits of the RRSP and how it can benefit them.  The bottom line is there is no one size fits all solution when it comes to the RRSP or the TFSA.  Here’s some must read articles to help you deal with the debate of whether RRSPs make sense or whether TFSAs are better:

Investing your RRSPs

Remember that the RRSP is really an account, not an investment.  I like to think of it as a bucket of money.  When you put money into the RRSP bucket, you get a tax deduction.  When you take money out of the bucket, you have to pay tax.  As long as the money stays in the bucket, it needs to be invested and any grow on the money is tax deferred until withdrawal.

Here’s some articles to help you make investment decisions for the RRSP:

There’s only a few weeks left to the end of RRSP season so good luck with your RRSP decisions this year.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites Group Benefits Online and Advisor Think Box.

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