March 1, 2017 is the RRSP contribution deadline for 2016. Below we discuss five benefits of contributing to your RRSP.
Deferral of Taxes
Depositing funds into your RRSP allows you to defer and potentially minimize tax. By contributing to your RRSP now, you can claim a deduction in calculating taxable income on your current tax return. It is a deferral because when you withdraw money from your RRSP, you have to include the withdrawal as income on your personal income tax return for the year in which the money was withdrawn.
The benefit to this is that you are more likely to be in a higher income tax bracket when you are working full-time compared to when you are retired. Therefore, the current deduction will reduce income that is likely being taxed at a higher rate, compared to in the future when the withdrawal will likely be taxed at a lower rate.
All Contributions Grow Tax Free
Contributing to your RRSP now not only gives you a deduction on your taxes, but it shelters your money from tax as it grows. When money is in your RRSP, you will not have to pay any tax on your investments as they grow. Note, you will have to pay tax on the full amounts withdrawn from your RRSP in the future.
The biggest advantage to this is that you will not pay tax on investment income earned in your RRSP each year. You do not have to report investment transactions or income within your RRSP, and all the money earned can stay in the account and grow.
Investments in non-registered accounts require you to pay tax on your investment income every year and may require having to withdraw money from your investments to pay the tax.
Spousal RRSP Contributions
The ability to contribute to a spousal RRSP is another benefit. When a spouse contribute’s to his or her spouse’s RRSP, the result is a deduction for the contributing spouse while increasing the RRSP investment in his/her spouse’s RRSP account.
Doing this can act as a way of splitting income as the contributing spouse gets the current deduction, while the other spouse will be taxed on the withdrawal when it is made, assuming the withdrawal is not made within three taxation years of the contribution. Spousal RRSPs are often most beneficial in situations where one spouse earns more than the other, as it helps reduce higher rate tax for the contributing spouse.
Note that spousal RRSP contributions count against the contributor’s deduction limit.
Home Buyer’s Plan
Many people worry about contributing to their RRSP because it is seen as a long-term investment, and they have shorter-term goals like buying a house. You can invest in your retirement while still saving for short-term goals.
The RRSP Home Buyer’s Plan (HBP) allows for one withdrawal in a calendar year of up to $25,000 for the purchase of a qualified home. You are not taxed when you withdraw the funds, but the money must be repaid into your RRSP or brought into income over a 15 year repayment period. Typically, people take the full 15 years to recontribute into their RRSP, but you can pay back the full amount any time before. Read more about the plan here.
Lifelong Learning Plan
This benefit is not as commonly used, but can be very beneficial if you or your spouse decide to further your education. The Lifelong Learning Plan (LLP) allows you to withdraw up to $10,000 in a calendar year for full-time education. The maximum you can withdraw in a lifetime with the LLP is $20,000.
You can only use the LLP to make withdrawals for yourself or your spouse. It cannot be used for children. Read all the conditions here.
Should I Contribute to my RRSP?
Whether or not you should contribute to an RRSP is dependent on your specific situation, as there are many factors that impact each individual’s investment decisions. There are many options available when saving for retirement, and an RRSP is just one option available to you.
If you are unsure where you should be investing your money, it is best to speak with your investment advisor.