A (big) last-minute decision
RRSP season likely has many pondering whether to make one more contribution for the 2022 tax year, but is it worth the trouble?
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Circle the calendar.
March 1 is the last day you can contribute to your RRSP for 2022.
If you’re thinking, ‘big deal,’ in a way that’s not really a big deal at all, you’re probably not alone.
It’s difficult to say for certain how much people contribute just before the deadline to reduce taxes owing upon filing, or boost their tax refund, all the while saving for retirement.
But it’s safe to say more could give it some thought given Canadians contribute an average of about $3,600 annually, according to Statistics Canada data.
Of the approximately 28 million taxpayers, only 20 per cent actually do contribute to an RRSP annually, let alone in February.
In Manitoba, just under 20 per cent of filers contribute an average of about $2,500 annually.
That’s far below the maximum annual contribution of $29,210 for 2022 for the highest income earners. Of course, the maximum annual contribution varies by individuals’ income, but based on the aforementioned data, most Canadians do not contribute the maximum annual amount — that being 18 per cent of their earned income — to an RRSP.
So, the RRSP deadline offers an opportunity for Canadians to boost their retirement savings, allowing us about two months into the new year to make additional contributions that can help reduce taxes paid or owing for the previous year.
“The deadline always falls on the 60th day of the new year,” says Josee Cabral, senior tax specialist with H&R Block Canada.
Sometimes that’s the last day of February during a leap year, but mostly it’s March 1, she adds.
Although everyone’s situation is different, and consequently not everyone should make a last-minute contribution, most people under age 71 with earned income should at least give it some thought.
“A lot of people have money drawn from their account every month into their RRSP,” Cabral points out. “They have a set amount contributed every year automatically.”
In effect, they are already making that last-minute contribution.
“Other folks may be self-employed or know they owe taxes upon filing, so they will typically make a lump sum this month to reduce or eliminate that amount,” she adds.
Others have more money sitting around after a good year financially, and a last-minute contribution will add to their retirement nest-egg and provide a tax refund in the spring.
Yet no one should rush into contributing last-minute, says Doug Nelson, Winnipeg certified financial planner and author of Master Your Retirement.
“It’s important to prepare a sort of first draft of your tax return now so that you can see what your tax picture is and the extent to which an additional RRSP contribution can reduce taxes owing.”
In other words, do the opposite of what most people do, says Jackie Porter, a certified financial planner with Carte Risk Management Inc. in Mississauga, Ont.
“A lot of people wait until it’s too late, so they often end up facing another year where they’re behind on taxes and saving for retirement.”
Of course, we have good reason to delay tackling our tax returns until after February. Most key documents — T4s, T3s, charitable donations and RRSP contributions — do not arrive until February (some even in March) even though we can start filing returns on February 20.
Impediments aside, all three experts interviewed emphasize the importance of doing ongoing tax preparation throughout the year, which includes understanding how much you’ve earned, and a general knowledge of available deductions — RRSP contributions included.
That way, by February, you have more clarity if a contribution makes sense, Porter says.
“Ideally, I work with clients to make regular, monthly contributions so in most cases they don’t have to stress about a last-minute contribution.”
Indeed, Canadians have enough stressors.
Porter points to the Financial Planners Canada Financial Stress Index from last spring that found about two in five Canadians cited money as their top stress.
Also notable: those surveyed, helped a financial professional, felt less stressed.
That ‘professional’ can be a financial planner — who can help build a retirement plan. Or it can be a tax preparer like Cabral.
“What’s great with working with my clients is, come mid-February, we can run a simulation of their taxes and figure out if a last-minute contribution to reduce taxes makes sense.”
Of course, you don’t even need professional help thanks to online tax preparation solutions that include RRSP contribution calculators to help fine-tune a last-minute contribution.
Either way, it’s worth running the numbers, particular in this age of the gig economy with more people doing side-jobs, or self-employed.
For them, RRSP season (February, really) can be pivotal, says Nelson with Nelson Financial Planning Corporation.
“If you earned income in 2022 that you have yet to pay tax on, you need to make sure you have money available to make these payments.”
More pointedly, a last-minute RRSP contribution can reduce the amount owing—though “you may still end up still having to pay some tax,” he adds.
Still, it’s better to reduce the tax burden even a little — and save for retirement — than to do nothing.
So, while an extra contribution this month may not be for everyone, most will likely benefit from some early tax preparation to know if it does, Cabral says.
“That’s the best approach — just to be aware of your tax situation well before it’s time to file.”