It is hard to believe, but we are now almost to the midpoint of what we have traditionally called "RRSP season." This was so named because, incredibly, past generations used to actually procrastinate on their RRSP contributions until close to the deadline.
Yes, it's hard to believe. I know you have completed your contributions for the 2014 tax year, to get your investments into the tax-sheltered environment of the RRSP as soon as possible.
However, in case you are still thinking about your 2013 contribution, the deadline is 60 days after the year end, in order to deduct your deposit on the previous year's income tax return. That usually takes us to March 1, but that's a Saturday this year, so the official deadline is midnight on March 3.
(I can just picture the consternation among financial services workers as a result of me letting that cat out of the bag, so please consider your personal deadline to be Feb. 28, to limit my list of enemies.)
All of us have to put money aside for our retirements. So, when I ask the question, "Is the RRSP the right vehicle for you?" let's agree that if the answer is no, then you have to choose an alternate vehicle into which to accumulate for retirement. Answering no does not get you off the hook.
There are great things about RRSPs. One is the reduction in taxable income that results from a contribution. This reduces tax for most people and allows them to leverage the tax reduction into higher savings capacity.
As investments grow, there is no tax each year on the investment income and growth in the RRSP account, allowing them to compound tax-free until withdrawn.
(Another tangible benefit is the annual deadline for contributions provides an extra push for procrastinators to make a decision about their annual savings targets.)
Again, I'm hesitant to say the following point out loud, but, if the annual deadline is missed, the unused contribution amounts carry forward for use in future years.
The 2013 limit is 18 per cent of 2012 "earned" income, maximum $23,820, plus unused contribution room carried forward. "Earned" income is the sum of employment, net self-employment, net rental and alimony income.
For pension plan members, the limit is reduced by the amount of your "Pension Adjustment" on box 54 of your T4 slip.
RRSP, TFSA or...?
Your choice of investment "location" (RRSP, TFSA or non-registered investment account, or even corporate holding company) depends on a number of factors. The most important ones are your current marginal tax rate and the rate you expect to have when you will be withdrawing money from your accounts in the future.
Higher tax rate taxpayers (above $67,000 of taxable income after deductions) receive a higher immediate tax benefit for an RRSP contribution, but will generally be taxed at a higher rate when they withdraw the money.
For example, taxable income of $20,000 means tax reduction at a rate of 25.8 per cent of the contribution (and a real incentive to consider a TFSA instead), rising to tax savings of 34.75 per cent for taxable incomes between $43,561 and $67,000, and 46.4 per cent above $135,054. (But remember, those people were already paying 46 per cent rate on the last few dollars they earned.)
All withdrawals from RRSP (or RRIF) add to taxable income, and taxes are applied at the same rates as above. RRSP withdrawals also add to NET income, which is the figure the government uses to calculate a range of income-tested benefits, including OAS, the Guaranteed Income Supplement, GST tax credit, and a range of other credits.
If you are in one of the top tax brackets now, an RRSP is likely your first choice, and then re-invest your tax saving, either to pay off debt or contribute more to an RRSP.
In the lowest tax brackets (up to $31,000 taxable), using an RRSP contribution may save you less tax now than the withdrawals will cost you down the road in retirement. For you, the better choice is likely the TFSA or even a non-registered investment account, using the appropriate proportion of equity investments for your situation.
In all cases, though, the most important decision is to do something.
David Christianson, BA, CFP, R.F.P., TEP, is a financial planner and adviser with Christianson Wealth Advisors, a Vice President with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.