With the end-of-the-month deadline looming for RRSP contributions for the 2011 tax year, many Canadians will do the easy thing: ignore it.
Don’t do the easy thing. Especially if you’re in your 50s and 60s.
Because, like it or not, you’re running out of time.
And you risk squandering a major asset — unused RRSP contribution room — at a time in your life when you can make the best use of it.
How many years do you have ahead of you in a high (or relatively high) income-tax bracket? Five? Ten?
That’s when RRSP contributions earn you the biggest bang for the buck.
One of the least understood aspects of RRSPs is the way they treat tax brackets differently.
Quebecers with taxable incomes above $83,088 will get back roughly $450 in tax refunds per $1,000 of RRSP contribution in 2011.
Those with taxable incomes below $39,060 will get about $300, or less.
So the RRSP contributions you make when you’re earning top dollar generate the largest refund.
If you carry a large amount of unused RRSP contribution into retirement or semi-retirement, you’ve effectively conceded to governments the tax load they imposed during your best earning years.
And there’s no going back. While you don’t have to take all (or part) of an RRSP contribution in the same tax year you make it, it can only be carried forward, not backward. You cannot retroactively deduct it from income from previous tax years. The window closes annually at the end of February.
All of which makes use of RRSP contribution room an integral part of a cohesive retirement strategy, for couples as well as individuals.
If you don’t have the funds now, it may even make sense to take an RRSP loan. You’ll be shoring up retirement savings and getting back larger refunds (which can then be used to pay down the outstanding loan).
Don’t feel you need to use all the unused contribution room. The total’s well into six figures now for many Canadians, and unless you happen into an inheritance, there’s little likelihood of ever using it all up.
But a case certainly can be made for making a dent in it, especially to reduce income taxed at a marginal rate north of 40 per cent (in Quebec, that starts around $41,544 in taxable income).
Tax-free savings accounts (TFSAs) are an excellent savings vehicle, the key building block for the young, seniors and low-income earners, but they don’t have the ability to alter taxable income — and by extension, various government benefits and tax credits — that RRSPs have.
Low to non-existent investment returns in recent years understandably have soured a lot of RRSP holders, some of whom now are opting to reduce their mortgages rather than make additional contributions, but in the big picture, RRSPs still matter.
Taken from the Financial Post
Written By Paul Delean
