Ok, I’m sure you already know the basics about the Registered Retirement Savings Plan (RRSP) – so let’s play a game of True or False.
- RRSPs are an investment product themselves so go out and buy some RRSPs now!
- You can only contribute in February and March when the banks start advertising for them.
- RRSPs are great because withdrawals will eventually be 100% tax-free like the TFSA.
- The RRSP contribution limit is $23,820 for the 2013 tax year with no exceptions.
- The RRSP contribution deadline this year is March 1, 2014, like it is every March 1st for every tax year.
I’m confident you know these answers, maybe thanks to these bloggers and financial experts for their articles over the last few weeks discussing Registered Retirement Savings Plans (RRSPs) and sharing their opinions on them: Big Cajun Man, Michael James on Money, Preet Banerjee, and Kyle Prevost.
My wife and I don’t subscribe to “RRSP Season” and instead contribute to our tax-deferred accounts throughout the year. We tend to optimize these accounts: contributing enough money to our RRSPs to avoid paying any income tax and if anything get a modest refund back.
Why do we optimize our RRSPs?
Maximizing the RRSP account takes a whack of cash – saving 18% of our income is a very challenging task because we have competing priorities:
- Paying down our $200,000 mortgage.
- Maximizing our TFSA contributions every year.
- Enjoying life.
RRSPs are excellent accounts because the contribution you make lowers your taxable income and you may get a tax refund because of it. On the note of the refund, just be mindful this is really a long-term loan from the government. At some point the tax man will find you (and I) and ask for his refund back. This is why it makes sense to reinvest the tax refund associated with your RRSP back into the account every year although there are other good options; namely invest the refund back into TFSA or pay down debt.
RRSPs are a great financial tool and we’ll continue to use our accounts for years to come. Before you rush out to “buy RRSPs” as part of “RRSP Season” consider how you’re using this account as part of an overall financial game plan.
What do you think about our approach? What’s your game plan for RRSPs?