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Every season is the right time to save for retirement, but only one season makes those savings matter now. Between New Year's Day and March 2, every RRSP contribution still counts toward last year's income—which makes these eight weeks feel a little more urgent than the rest.
It sounds odd: aiming to lower your income.
But lowering your taxable income by contributing to an RRSP can help you keep (and invest) more of what you earn.
A VERY TAXING SITUATION
Registered Retirement Savings Plans (RRSPs) come with two built-in benefits. The big one is simple: they help you save for your future self.
The retired you who travels, swims, guest-lectures, and spends gentle afternoons re-reading Infinite Jest. That's the long game.
The second benefit lands right away.
When you contribute to an RRSP, you reduce your current tax bill—immediately.
How does that work?
Every dollar you put into your RRSP is tax-deferred. Instead of paying tax on that money now, you pay it later—ideally in retirement.
Say you live in Ontario and earned $140,000 last year. If that's your only income, and your tax was deducted at source, you've already sent about $42,000 to the CRA.
You can claw some of that back by contributing before March 1st. An $18,000 RRSP contribution would reset your taxable income. Instead of paying $42,000 in taxes and CPP/EI premiums, your total would land closer to $34,000—and you might even see a healthy refund.1
And later, when you withdraw?
Yes, you'll pay income tax on that money. But ideally, you'll pay it as a retiree, when your marginal rate is lower than it is today.
When you decide whether to contribute, you're really deciding when you'd rather pay income tax. The CRA will collect either way. RRSPs simply let you choose between paying now, as a working lawyer, or paying later, when your whole LinkedIn profile reads “Out of Office.”
KEY TAKEAWAY. Ask yourself whether your income is higher today than you expect it to be in retirement. If you're early in your career, it may make sense to take the tax hit now and invest in other ways—like with a TFSA. If you're in your peak earning years, it might* make sense to defer as much tax as possible by contributing to an RRSP today.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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