In Canada, the time frame in which you can contribute to your RRSP account for a particular calendar year runs from March 1st to February 28th of the following year. For example, you can contribute to your RRSP account until February 28, 2013 in order to get the tax deduction on your 2012 taxes.

If you have or intend to open an RRSP account there are few things that you should know to best utilize this option that you have.

1.  With RRSP’s, the goal here is defer tax on income that you earn in a higher tax bracket now until sometime in the future where your annual income is taxed at a lower tax bracket, and thereby creating added savings now.

For the individual whose income falls below the first tax bracket, RRSP’s are not as beneficial to you as it is for higher income earners. The reason is that for every dollar you contribute, you get a refund of 25%  to the dollar on your taxes. However, when you pull the money out at retirement,  those tax deductions will be taxed back to you. Assuming you are still in the lowest tax bracket when you retire but above the basic personal exemption amount, you will pay back that 25% you received now. In essence, you are borrowing money now, but will repay at retirement. If this is your situation, you may not want to go this path and maybe a TFSA is better for you.

For individuals who’s income falls in a higher tax bracket, RRSP’s are very beneficial. In essence, this works the same as above but with some more added benefits. For example, if you earn income in the highest tax bracket of say 39%, and contribute $10,000 to your RRSP’s, you will get a $3,900 tax refund. The first 25% ($2,500), you will pay back when you retire. The remaining 14% difference ($1,400), you get to keep in your pocket now and never pay back (assuming you are in the lowest tax bracket when you retire) .

2. To make RRSP’s work best for you, you should re-contribute your resulting tax refund into another RRSP for the following calendar year.

By following this method, you are essentially reinvesting government funded tax savings. Nothing wrong with that.

3. If one spouse in a household earns little to no income now while the other earns a high income, take advantage of that situation.

Under the current tax rules, it is possible for the higher income earner to contribute RRSP’s to his or her spouses RRSP account. In this case, the contributor always gets the tax deduction. The advantage here is that after 3 years, your spouse could almost essentially pull that money out tax free if they have no income and that refund you got now can be pocketed for good. Alternatively, at retirement your spouse can pull the money out relatively tax free as they wouldn’t be expected to receive any continuing pension income that the higher income earned would.

Under this scenario, you would fully be taking advantage of tax splitting.

4. If you plan to purchase your first home, take advantage of the Home Buyers’ Plan (HBP) program.

Under this plan, each spouse (or future spouse) can withdraw $25,000 from their RRSP account  tax free up front. The withdraw would have to be paid back within 15 years or taken into income.

The advantage here is that say you plan to buy a house next year. You can get a big refund now on your taxes and use that towards a down payment on your house.

For more information on this program including whether you qualify or not please visiting the following CRA Guide RC4135 – Home Buyers’ Plan (HBP):

http://www.cra-arc.gc.ca/E/pub/tg/rc4135/rc4135-12e.pdf

 

5. If you plan on going back to school, take advantage of the Lifelong Learning Plan (LLP) program.

This has the same concept as the home buyers plan but with a different set of rules and limits.

For more information on this program including whether you qualify or not please visiting the following CRA Guide RC4112 – Lifelong Learning Plan (LLP)

http://www.cra-arc.gc.ca/E/pub/tg/rc4112/rc4112-12e.pdf

 

6. If you are nearing retirement, you may want to beef up your RRSP account and take full advantage of any refunds you can get.

This is dependent on your historical RRSP contributions and personal income situation. For individuals who don’t expect to receive much income when they retire and haven’t contributed much to their own or spouses RRSP account, you could set yourself up for a substantial refund of taxes that you can keep.

You have until the age of 71 to contribute to RRSP’s. At this time, it would be mandatory to setup an annual RRIF plan to start withdrawing those RRSP’s.

For more information visit CRA’s pamphlet 119:

http://www.cra-arc.gc.ca/E/pub/tg/p119/p119-11e.pdf

For more information visit CRA’s Guide T4040 – RRSPs and Other Registered Plans for Retirement:

http://www.cra-arc.gc.ca/E/pub/tg/t4040/t4040-11e.pdf

 

7. Talk to a certified tax professional and accountant

No one can tell you how the system works best better than your accountant. Your accountant understands both the financial planning side to RRSP’s as well as the taxation side. Your accountant can also help you determine your desired RRSP level annually as well as your retirement picture.

 

If you would like more information about RRSP’s, you can visit the following link at CRA:

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/menu-eng.html

 

If you would like more information on the above we would gladly be able to assist you with your needs.