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How Much Should I Contribute to my RRSP?

how much should I contribute to my RRSP?

 

 

 

 

We are all becoming more and more aware of the importance of saving for retirement.  Unfortunately, many people have no idea how to go about it.  Some people say it’s best to try to max out your RRSP (Registered Retirement Savings Plan) contribution space each year.  I disagree.  Instead, I recommend contributing enough to take advantage of a lower tax bracket, and then contributing to a TFSA (Tax Free Savings Account) or a non-registered investment account (IA) to supplement additional retirement savings.

I say this because the main advantage of contributing to an RRSP is the tax deduction and the tax-deferred growth.  If contributing $4000.00 in a given year brings you to a lower tax bracket, there is no need to contribute anymore than that since you have already maximized the tax benefits.

On the other hand, that doesn’t mean that you shouldn’t be building up your retirement savings in other ways such as by contributing to your TFSA (up to $5000 of additional contribution space is added each year) and/or contributing to a non-registered investment account.

Once you’ve determined how much you need to contribute to your RRSP, if you still have funds remaining that can be used for retirement savings, I would suggest building up your TFSA, because you don’t have to calculate your capital gains or losses, and more importantly, you don’t have to pay tax on your earnings.  It is also much easier to withdraw from a TFSA if the need arises.

Before deciding on how much to contribute to your RRSP, I would highly recommend checking out  http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html on the Canada Revenue Agency website to see exactly how much you should contribute to maximize your tax benefit.  After that, if you still have room in your budget, consider putting some money into a TFSA and then an IA and set yourself up for success.

For more detailed information on RRSP related topics, check out my RRSP Page.  You can also check out my e-book about RRSPs.

Investing

Some Fast Facts About RRSPs

An RRSP (Registered Retirement Savings Plan) can be a great way for Canadians to save money for retirement.  They have various advantages and disadvantages and some of them are discussed below.

First of all, the advantages:

  • Your contributions to an RRSP are tax-deductible.  You don’t pay tax until you withdraw from it.  Hopefully you won’t have to withdraw any of the funds until you retire.  Presumably you will be in a lower tax bracket by the time you retire and as a result you will pay less tax.
  • Any income or capital gains earned from RRSPs is also tax deferred.
  • You can split your retirement income by contributing to a spousal RRSP and as a result your household will pay less tax.
  • RRSPs can be transferred from one financial institution to another and you can have more than one.

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