RRSP contribution hunt

Tax-sheltered growth worth the trouble

The Registered Retirement Savings Plan (RRSP) is the single most powerful tax-deferral vehicle available for Canadians saving for their retirement. That’s because contributions are tax-deductible in the year they are made, investments grow on a tax-deferred basis inside the plan, contribution size is relatively large, and unused contributions can be carried forward year to year. This year, the deadline for contributions eligible for a 2021 tax deduction is March 1, 2022.

Your maximum contribution to an RRSP is calculated as the lesser of 1) 18% of your earned income from the prior year, or 2) the maximum contribution limit for the tax year ($27,830 for 2021), or 3) the limit after deducting company pension plan contributions. “Earned income” includes your salary, but may also include alimony payments and rental income, but not investment income.

It’s generally a challenge for most people to come up with the maximum annual contribution. So contribute as much as you comfortably can each year, but start early and do it consistently. Here are some ways to get that RRSP contribution going:

Automatic deposits. Make a direct deposit with every paycheque. Your money is invested and starts compounding that much sooner.

Severance payments. If you received a severance payment in 2021, use it to make a contribution. Not only will you top up your RRSP but you’ll also shelter some or all of the severance from income tax.

Inheritances. Use part or all of a bequest as an RRSP contribution. Bequests are not usuaally taxable as income, but income from that bequest is. In an RRSP, investment growth is tax-sheltered until your RRSP matures. Plus, you’ll get a tax deduction for the contribution. Careful with large bequests, though. A large contribution could put you over the deduction limit and attract penalties.

Contributions in kind. Qualifying non-registered investments may betransferred to an RRSP at their current value. Bear in mind that there will be a “deemed sale” of the asset from the non-registered account, and 50% of any capital gain may be taxed. By the same token, you’ll get a tax deduction on 100% of your contribution.

Carry forward contribution room

One of the key features of RRSPs is that you can carry forward any missed contribution amounts indefinitely as extra room to add to future years’ contributions. Your unused contribution limit is also shown on your CRA Notice of Assessment. This may be especially useful for those who expect to be in a higher tax bracket in future years.

The sooner you start tax-sheltered compounding in your RRSP, the better. Start off with small amounts, gradually increasing as your income rises. Even a $500 monthly investment compounded monthly at a relatively conservative rate of 6% will grow to $500,000 in 30 years.

Another tip: Reinvest part or all of your tax refund. It’s found money that you can put to use in your RRSP immediately.

Speak with your financial advisor or qualified planner about more complex RRSP contribution ideas, such as contributions in kind, severance payments, and carry-forward amounts.

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.