Four questions to ask yourself ahead of RRSP season
One of those decisions is whether or not to contribute any more money to your RRSPs before the deadline of March 1, 2023. That’s right—any contributions that you make between now and March 1 will apply to your 2022 tax return.
(Pssst: If you’re not sure where to even start with your RRSP, check out this blog post for all of the basics).
1. How much contribution room do I have?
You’re only allowed to contribute a certain amount of money to your RRSP each year. This number is based on your unused RRSP deductions from the previous year and your annual income.
Okay, that’s great, but how am I supposed to know how much room I have in my RRSP? It’s a little different for everyone, but you can find out by logging into your CRA account, looking at your T4 slip, or by calling the CRA.
Why does your RRSP limit matter? You only save money on your taxes for the amount you contribute under your limit, before the RRSP deadline. And saving money is the goal, right?
2. Tax bracket? What’s that?
Taxes are based on the amount of taxable income that you make each year. This includes your salary and any self-employed income. Here’s the good news: any money that you put into your RRSP for the year is deducted from your taxable income.
Let’s say you’re making $50,000 per year. You’re in the lowest tax bracket and you’ll pay the lowest amount of tax—that’s 25% in combined federal and provincial income tax. Since you’re already paying the lowest amount of taxes, contributing more to your RRSP won’t affect your tax rate. That’s not to say that you shouldn't be saving for retirement—but we’ll get to that later!
Here’s another example. If you make $65,000 per year you’ll have a higher tax rate of 30.5%. Any money you contribute to your RRSP will be subtracted from your total taxable income. And if you contribute enough, you might even drop down into a lower tax bracket, meaning you’ll owe less taxes.
What tax bracket are you in? You can find out, and see the provincial and federal tax rates so that you can figure out your next steps.
3. What am I saving for?
RRSPs are great for long-term savings, usually retirement. That’s because you’re taxed on the money in your RRSP when you withdraw it (instead of when you earn it). Since you’ll likely have a lower income after you retire, it’s often the best time to start to use that money.
Don’t get us wrong—saving for retirement is important. But it’s not your only savings option and probably not your only savings goal.
If you’re saving money for shorter-term goals, consider using a TFSA. This type of account is much more flexible for shorter-term savings goals, and often have great interest rates. And, you won’t get dinged for withdrawing from them when you need the money. If you’re younger, consider maxing out your TFSA contributions before your RRSP. That car, vacation, laptop or pet that you’re saving for is so much easier to purchase through a TFSA.
4. Am I planning to buy a house anytime soon?
Yep, people are still buying houses (somehow). First-time home buyers can actually use some of their RRSP money towards their downpayment. As long as you’re moving into your house within one year of withdrawing the funds and are a first-time buyer, you can take out $35,000 without being taxed. Just remember, you do have to pay the amount you withdrew back into your RRSP within 15 years to avoid being taxed on it.
If you’re looking to buy a house, it doesn’t hurt to contribute a little extra to your RRSP this year so that you can withdraw it tax-free when it’s time to make that down payment.
Remember, just having savings is a huge first step — you’re already killing it! There are a lot of different ways that you can use your extra money. And it’s not always easy to figure out the best approach. When you’re getting started, it’s a good idea to talk to a human—someone who can really understand your needs and give you the right advice for, well, you.
As tax season approaches, we can help you max out your returns. Just book an appointment with us. It’s easy. And you can do it without even having to pick up the phone.