A joke on Twitter sometime around March last year read as follows: “I am happy that I learned about parallelograms at school, it has really come in handy this parallelograms season!”
Of course, this disgruntled Twitterati, with this perfectly prosed-opus of a joke, was promulgating his frustrations of dealing with the tax season.
We as average citizens are indeed not well versed with the intricacies of our tax system. Insult to injury, most tax laws are written in an esoteric language. It’s not only incomprehensible but also frightening for the average person.
But fear not! With this article, our goal is to educate you on the important topic of RRSPs (Registered Retirement Savings Plan) and the RRSP Deadline for 2018.
So what is an RRSP and When is the RRSP deadline for 2018
An RRSP is an account that an individual can establish and is recognized by the government. The main objective of an RRSP is to reduce a person’s tax burden.
One common fallacy is that RRSP earnings are tax-free. Unfortunately, that is not true. In fact, the TFSA (or the Tax-Free Savings Account) is the only tax-free account that the government allows. For all others, you would have to pay taxes, such as capital gains, whenever you pull out funds.
So when’s the RRSP Deadline for 2018?
The RRSP deadline is usually on the 60th day of the year. Thus, for your earnings in 2017, the deadline is March 1, 2018. In other words, contributing to the RRSP within the first 60 days of the current year allows you to reduce your taxable income for the previous year. Keep in mind that when we say RRSP deadline for 2018, we are actually talking about the RRSP deadline in 2018 for the 2017 tax year. It is always best to consult your financial institution in advance. Ask them how they accommodate these deadlines.
So now that I know the RRSP deadline in 2018, how do I know am I eligible?
If you earn income, have a social security number and file taxes, you can contribute to an RRSP until December 31st of the year you turn 71. If you wish to contribute after that, you may use your spouse’s RRSP account until they turn 71.
Once you hit the age of 72, you have theoretically hit your RRSP deadline for your lifetime. After the age of 71, you must convert your RRSP account into a RRIF (Registered Retirement Income Fund), buy an annuity or withdraw all funds from the RRSP. It’s recommended that you consult a financial advisor to chart out the best course of action for the funds inside your RRSP.
As for the minimum age, there is none. But one must be at least 18 years old to contribute more than $2,000.
How Much Can I Contribute?
Below is a simple formula for calculating your RRSP contribution room.
Unused RRSP amount + 18% of total earned income – pension adjustment = RRSP limit
Please note that this amount cannot exceed the RRSP contribution limit as specified by Canada Revenue Agency (CRA), which for the year 2017 is $26,010.
Earned income equals the total of employment (including tips), self-employed net income, CPP/QPP disability payments, alimonies, and rental income. Investment income such as capital gains, dividends, and interest are excluded from earned income calculations.
Pensions (including DPSP, RRIF, OAS, and CPP/QPP income), retiring allowances, death benefits, and limited-partnership income are also not considered as earned income. If you wish to learn more about this topic, Revenue Canada’s Form T1023 (Calculation of Earned Income) specifies all sources of earned income.
However, for most people the best way to identify this amount is to look at box 14 of their T4 slips.
Pension Adjustment (PA) signifies the amount of pension benefits received through a registered pension plan or deferred profit sharing plan.
For those who were a member of a pension plan for a post-1989 year of service upgraded retroactively, a Past Service Pension Adjustment (PSPA) must be made.
Unused RRSP amount
One of the RRSP’s features is that any contribution room left after the RRSP deadline carries over into next year’s contribution room. For instance, if you have $15,000 of unused space at the RRSP deadline this year, then this entire amount will be added to your contribution room next year.
A more comprehensive example is presented below, based on the assumption that an individual did not use any of their RRSP contribution room since 1990.
[table id=17 /]
What is over-contribution and its consequences?
At first glance, these calculations may seem mundane and unimportant. However, if you want to avoid stiff penalties due to over-contributions, you better be on-point about your contribution room.
The CRA does allow leniency up to $2,000 in over-contributions. Also, it is important to understand that this is a cumulative lifetime limit, not each year.
Many like to advertently over-contribute, which in turn leads to a higher amount that accumulates interest and dividends. But this over-contribution cannot be used to reduce the taxable income for that year. It will carry-forward to the next year and can be used to reduce your tax bill at that time, given that you have enough RRSP contribution room and it is contributed before that year’s RRSP deadline.
Penalties are stiff for over contributions
If you go past this $2,000 threshold, the CRA will impose a harsh fine of 1% per month on the excess amount for every month that it stays in your RRSP. One can apply for a waiver of this penalty, but approval is not guaranteed.
You can legally go beyond your stipulated limit by making contributions to your spouse’s RRSP account. Since you are the contributor, you would receive the tax deduction, but your spouse (or common-law spouse as defined by the CRA) would be the owner of the account. This is an excellent way to reduce the overall household tax bill if your tax bracket is higher than that of your spouse.
What are your tax savings?
To calculate savings, just multiply your tax bracket with your RRSP contribution for that year. Let’s assume that you fall in the 40% tax bracket and contributed $10,000, your tax refund in this case is 40% X $10,000 = $4,000.
As said at the beginning of the article, even though an RRSP leads to a reduced tax bill, it is not tax-free in itself. There is however one exception to this rule.
It is true that a person who is more than 71 years old must convert their RRSP to an RRIF, withdrawals from which are taxable. But if this person does not have a lifetime company pension or annuity then the pension credits of $2,000 annually are not being used. This credit can be used against withdrawals of up to $2000 from the RRIF, as income from this account in pensionable.
When should I start contributing?
Now that we have dealt with the nitty-gritty, let’s move to strategy. When should you start contributing to your RRSP account? Short answer, as soon as possible! If you haven’t been contributing, you more than likely are not worried about the RRSP deadline as you will not max out your contribution room in one year.
In the short-term, namely contributions for the year in question, start in the first month. Is the year in question 2017? Check your balance against the available room at the end of the year, and make the necessary adjustments if you see that you have over-contributed.
There are two good reasons for taking this approach. First, you won’t stress and scramble at the end of the year. Second, your investments will have room to grow throughout the year.
When it comes to the long-term, specifically contributions throughout one’s life, it’s also ideal to start as early as possible. The first two reasons being quite like those stated above. Your investments will benefit from compounding over your entire life. And you won’t scurry to make investments when you start nearing retirement age.
Retirement planning is crucial
In most cases individuals who postpone retirement planning until later years make speculative and risky decisions in the dreams of a high return, only to end up losing all or part of their savings. Retirement planning is an extremely important exercise, and doing it accurately requires a long-term commitment.
Furthermore, neglecting RRSP contributions means that you are paying more tax than you should, which in turn implies that you are duping yourself towards a smaller retirement cushion.
Finally, RRSP contribution limits are so high that playing the “catch-up” game can be a formidable task. In the table that we presented above, someone who has a significantly high salary and does not use their RRSP account for a period of 10 years would have a room of close to $200,000. Imagine having to cut expenses to use all that margin.
What are some remedies to use a huge amount of RRSP contribution?
It could be that you are someone who is already lagging and must play the catch-up game. Easier said than done, but lo and behold, there are certain effective remedies that we can suggest.
Remedy 1:The drill-sergeant method
This approach requires infallible amounts of discipline, along with plenty of teeth gritting. You would dollar-cost-average into filling your account by committing to a certain amount per month ($2000, if you are making more than $140,000/year) in the form of a pre-authorized chequing arrangement with your financial institution.
Remedy 2: Robinhood method
With this, you are stealing (or borrowing) from your richer accounts, such as the TFSA or non-registered account, and depositing the proceeds in your RRSP. An advantage here is that these transfers can be done in-kind.
Simply put, you can move securities such as stocks, ETFs, bonds etc. into your RRSP. And if you are doing so from an account that had tax liabilities, you would be moving money from fully-taxed to deferred-tax status.
Remedy 3: The last resort
If the above two remedies are not an option, the best path is to borrow from a financial institution. Many establishments offer loans specifically for this purpose, known as Carry-Forward RRSP loans. Some banks also offer 12-month zero-interest (or low interest) credit cards that can be used for this purpose.
Either way, please make sure that you use the resulting tax refund to pay off the resulting loan to avoid interest charges, which could wipe out any gains made through RRSP tax deductions.
What investments can you make with the RRSP?
Contributing to an RRSP is not just about saving money and reducing the tax burden, it’s about growing your money. To be precise, making intelligent investment decisions in the form of stocks, bonds, ETFs or any other eligible asset class.
Younger people can afford to be more aggressive with their RRSP accounts as they have more time to plan their retirements. On the other end of the spectrum, those nearing retirement ought to be more conservative.
In short, hold more stocks and ETFs when you are young, instead of investing in bonds when you are older. If you are new to stock investing, you can read our how to buy stocks tutorial to start-off on the right foot.
Other uses of the RRSP
With the HBP, you can use up to $25,000 from your RRSP towards the down payment of your first home. This withdrawal will not be taxed. But the catch is that you must pay this amount back into your RRSP over the next 15 years.
In the LLP, you can withdraw up to $10,000 to pay towards your education. There are certain conditions, such as enrolment on a full-time basis and studying at a designated educational institution. Also, the program should be a “qualifying educational program.” As with the HBP this amount must be paid back, in this case over a period of 10 years.
RRSP deadline and helpful information conclusion
There you have it! The entire RRSP subject deciphered in a comprehensive manner to aid you in your tax and retirement planning. An RRSP is an excellent tool, given that you start as early as possible and make the right decisions. If you do so and can maximize your contributions every year before the RRSP deadline, a comfortable retirement is in the cards!