Every year, Canadians go through a financial ritual – the RRSP season. In the first 60 days of the year, Canadians can make contributions to their RRSPs and use these contributions as tax deductions for their previous years tax return which has to be filed by April 30th.
In most years the RRSP deadline falls on March 1st (March 3rd for 2014). The exception happens every four years in a leap year where the RRSP deadline happens on February 29th. Here are some leap years past and present – 2008, 2012, 2016, 2020, 2024, 2028.
Timeless RRSP tips for last minute contributors
As the RRSP deadline looms, here are few RRSP tips for the last minute contributors:
- Don’t make rash investment decisions. If you are not sure what to invest in, don’t feel pressured to make a long-term investment decision in a rushed manner. Instead, put the money into a high interest savings RRSP account but be sure to get the RRSP invested once you’ve had more time to research your options. If you have an investment plan, strategy or Investment Policy Statement, you can just invest the contribution as per the plan. When you are ready, here's an article with some of my top timeless investment tips for RRSPs
- Should you make it a spousal contribution? If you have a spouse, your contribution can either go into your personal RRSP or a spousal RRSP. If the contribution goes to a spousal RRSP, you will still get the tax deduction but your spouse will pay the tax when they withdraw the money from the spousal RRSP. It’s important to be aware of the spousal attribution rules within the first three years of any spousal contribution. with new pension splitting rules introduced in 2007, some have questioned whether spousal RRSPs still make sense.
- Watch your marginal tax bracket. One of the biggest benefits of contributing to a RRSP is the tax deduction equal to the contribution amount. If you want to truly understand the benefit of the tax deduction you need to know your marginal tax rate and how much of a contribution might bring you down to the next tax bracket. Making proper RRSP decisions is all about understanding my one formula approach to RRSPs.
- Buy your losers. It’s human nature to love your winning investments and hate your losers. As a result, most people are inclined to sell low (losers) and buy high (more winners) which is to opposite strategy to logic – buy low, sell high. This strategy of keep your winners and sell your losers may be the wrong approach. Before you dump your losers, consider why they lost. Sometimes good quality investments go down which makes drops in value great buying opportunities.
- You can defer the deduction. When you contribute to a RRSP, you do not have to use the deduction right away. In fact, if you think your income might be higher and potentially be in a higher tax bracket next year, you may want to use the deduction in the future year instead of this year. I have seen some people defer the contribution only to forget about it later or spend the money. Make the contribution and save the deduction for the future.
- Should you borrow to buy RRSPs? RRSP loans have been around for a long time and I have nothing against them if they are paid back within a reasonable amount of time. The problem today is people are taking longer to pay these loans off and the interest on the loans (which is not tax deductible) is offsetting the benefit of the tax deduction in the first place.
- Develop a RRSP contribution strategy. We live in a busy world where more and more things seem to be last minute. Instead of making RRSP contributions near or at the RRSP deadline, consider developing a RRSP contribution strategy. Make contibutions automatic. If you have a group RRSP plan through work, take advantage of the convenience, the employer matching and lower fees. If you don’t have a plan through work, set up an automatic deduction from your bank account. Pay yourself first will pay off over the long run!
Time is ticking away as we head towards the RRSP deadline so use these 7 timeless RRSP tips for the last minute RRSP contributors wisely.
For more information on RRSPs, check out my RRSP Online Guide. It's packed full of information to make great RRSP decisions.