We’re nearing the end of the 2017 RRSP deadline, and if you haven’t already done so, you may be considering topping up your RRSPs before March 1st. In order to avoid over-contribution penalties, it is wise to have a good understanding of exactly how much you can contribute into your RRSP. Below are some steps to follow before making any further RRSP contributions.
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RRSP contributions
What is an RRSP Loan?
When you borrow money from the bank in order to contribute to your RRSPs, you are using an RRSP loan. There are different types available. Some need to be paid off within a year, while others you can pay off over a much longer time period. You will often be given a more favorable interest rate if you have your RRSP at the same financial institution that grants you the loan.
Canadians have until March 1st to make an RRSP contribution towards their Registered Retirement Savings Plan (RRSP) in order to take advantage of a tax deduction for the 2010 tax year.
Before you make this important decision, be sure to consider a few things:
Do you have the ability within your budget to make a contribution?
If you haven’t been contributing regularly all year, have you set enough money aside in order to make a lump sum contribution?
If you will be dipping into your emergency funds in order to make your contribution or you will be left just scraping by, then perhaps it is wise to just hold off in making any contributions this year. Why? Because if you are depending on your RRSPs as a back up emergency fund then there is no point in putting money into an RRSP in the first place. There are just too many tax penalties and negative implications for making an RRSP withdrawal.
If you had to withdraw funds from your RRSP in 2010, the good news is that you still have until March 1, 2011 to make a contribution to help offset your withdrawal. Although you will never get your contribution room back for the amount you took out, at least you won’t suffer as many tax penalties by putting some or all of the money back.
However, before you decide to put the money back, make sure that you can truly afford to do so. If you don’t already have some money set aside for emergencies, then it is probably better to refrain from adding any additional money into your RRSP. Why? Because you are just as likely to end up having to make another RRSP withdrawal and then it defeats the purpose of contributing to an RRSP altogether. Just be prepared to pay some tax in the Spring.
Most Canadians are aware of the existence of Registered Retirement Savings Plans (RRSPs) but they really do not know much about how they actually work or how they can use them to benefit them fully. Until just a few years ago, I thought that once you turned age 65, you were allowed to take the money out of them. How little did I know! Unfortunately most Canadians are still in the dark about RRSPs and when it is wise to use them.
RRSPs can be especially useful for regular employees who pay a lot of tax on their employment income. By contributing to an RRSP, they are allowed to defer their income tax. They benefit from lower taxes payable now, and then will expect to pay it later when they withdraw it (presumably when they retire and are at a lower tax bracket).