RRSPs: the most popular vehicle to save for retirement
Published by Harvest Portfolios Group
Registered Retirement Savings Plans (RRSP) are the most popular vehicle for Canadians saving for retirement. While it is recommended that you maximize your RRSP contribution each year to defer as much tax as possible while accumulating funds for your retirement, the question as to how much you should invest in your RRSP is based on your unique personal circumstances.
Firstly, it is important to understand the two main reasons why you may want to maximize your RRSP contributions:
1. Contributions are tax deductible
When you contribute to your RRSP, you can deduct your contribution from your income on your tax return, saving on taxes in the year you make the deduction. The higher your tax bracket, the more taxes you will save. If your income is lower in a particular year, you can carry forward the deduction for your contribution to a future year when your income is higher in order to realize a larger tax saving.
2. Contributions grow tax free
When you invest your RRSP contributions you do not have to pay taxes on any investment income or capital gains as long as they remain in your RRSP. This allows your money to compound tax-free in your RRSP, allowing it to grow faster.
Generally, you can contribute 18% of your previous year’s earned income to your RRSP subject to a maximum of $26,230 in 2018. However, if you did not use all of your RRSP contribution limit for the years 1991-2017, you can carry forward any unused amount to 2018. Therefore, your RRSP contribution limit for 2018 can be more than $26,230.
If your financial circumstances permit, then you should maximize your RRSP contribution.
One important consideration when thinking about maximizing your RRSP contribution is your marginal tax rate (or your tax bracket). If you are in a low tax bracket then you would be deferring less taxes than if you were in a higher tax bracket. Consequently, it might not make sense to maximize your RRSP contribution and instead consider investing in a Tax Free Savings Account.
You should discuss your options with your financial advisor.
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