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How to contribute to your RRSP


How to contribute to your RRSP

There are two approaches to planning your RRSP contributions: Short term and long term.

With the short-term approach, you contribute as much to your RRSP as possible every year in order to get the biggest tax deduction you can. This may benefit you now, but in retirement it could cost you.

Once you turn 71 — or sooner, if you decide — you’ll need to convert your RRSP into a Registered Retirement Income Fund (RRIF). At that point, you’ll be forced to withdraw a minimum amount from your RRIF each year as income. The more money you contribute towards your RRSP today, the more you’ll have to withdraw later.

Keep in mind, if your minimum withdrawal amount ends up being more than you actually need to maintain your lifestyle in retirement, that extra income will put you in a higher tax bracket, so a bigger chunk of your savings will go to taxes.

The long-term approach looks at your needs now, and your needs after retirement. That means figuring out what your living expenses will be after retirement, and saving enough in order to meet them — no more, no less. (For the sake of planning, retirement lasts until you turn 100).

Any savings in excess of that should go into a TFSA. When you withdraw the money from a TFSA, it won’t be taxed — meaning you’ll remain in a lower tax bracket after retirement.

It’s better not to get overtaxed in the first place. That’s where automatic deposits come in.

Automatic RRSP contributions

The best way to save consistently is to automate deposits to your RRSP on a regular basis, lined up with your payroll. That way, as soon as money comes in, some goes out to savings.

If you start making more money, you should make an adjustment to your savings to keep on track. Review the amount you’re contributing every couple of years, or when you get a major salary increase.


Who can contribute to an RRSP?

You can contribute to an RRSP if you:

  • Have earned income

  • Have a social insurance number

  • Filed a tax return

  • Have RRSP contribution room available

  • Are under 71. The end of the year that you turn 71 is your last opportunity to contribute.

Figuring out how much to contribute to your RRSP is important. Do it right, and you maximize your tax savings now, while setting yourself up for a good income after retirement. Do it wrong, and you could find yourself paying more taxes than you have to.



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