You’ve only got a bit of time before the contribution deadline for Registered Retirement Savings Plans (RRSPs). Here’s a guide to help you maximize your contributions as the deadline for 2024 tax year looms.
What is an RRSP?
The Registered Retirement Savings Plan (RRSP) is a tax-deferred investment plan that helps Canadians save for their retirement.
When is the contribution deadline for RRSPs?
The deadline for contributing to an RRSP for the 2024 tax year is March 3, 2025.
The Canada Revenue Agency says Dec. 31 of the year you turn 71 years of age is the last day you can contribute to your own RRSP. Here’s what your options are once you turn 71.
If you make contributions after this date, you’ll have to claim them as deductions on your 2025 tax return.
You can see how much TFSA and RRSP contribution room you through “My Account” on the Canada Revenue Agency website.
Disclaimer – This content is for education and entertainment purposes only. Steph & Den do not provide tax or investment advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. All investing involves risk, including the possible loss of principal.
How do I get the most out of my RRSP contributions?
Craig Bannon, director of regional financial planning and support with the Royal Bank of Canada, says to get the most out of your RRSP, it’s important to invest the savings you contribute because then you’ll gain the benefit of compounding.
Compounding allows you to gain earnings not only on your original investment, but also interest on your interest — so your earnings are generating even more earnings. That’s a win for anyone who invests inside their RRSP or Tax-Free Savings Account (TFSA).
Bannon says it’s also important to get into the habit of putting money aside regularly, and then routinely investing those savings, in order to help you reach your goals.
By making regular contributions throughout the year, you have the opportunity to grow your money faster than making one lump sum payment when contribution deadlines arrive.
“The magic happens when you invest the money,” he said.
When you invest money within your RRSP you gain the benefit of compounding, which helps your earnings generate even more earnings.
“You gain interest not only on your original investment, but also interest on your interest,” he said.
Bannon said Canadians often have money parked and untouched in their TFSAs and their RRSPs savings accounts for long periods of time.
“Our advice is to take control of that money and help it work harder for you, by looking for opportunities to invest,” he said. “In this way, you can build up your savings and give yourself the financial flexibility to reach your longer and shorter term goals.”
Putting money away throughout the year and investing as you go can be a good way to get the most out of either a Tax-Free Savings Account or a Registered Retirement Savings Plan.
When should I put money into my RRSP instead of my TFSA?
Each person’s goals will be different — and their financial flexibility to contribute to an RRSP or a TFSA will be different too, explains Bannon.
“Sometimes it can be beneficial to grow one of these investment plans before the other,” he said.
To help you understand which approach might be best for you, Bannon says you should consider:
- How soon do you need the money? Sooner rather than later?
- Do you have longer term goals in mind, perhaps around funding education, buying a home or retirement?
- How do you expect your income to change?
- Would it be more advantageous to reduce your income taxes now or later in life?
Bannon said it’s also important to consider how much of your current income you are willing or able to contribute to a TFSA and/or an RRSP.
According to MoneySense, generally those making more than $50,000 annually would do well to invest in an RRSP because the money you put in is tax deductible and your deductions go toward reducing what you owe.
Bannon said for many investors, the tax implications of each account type play a big part in deciding between prioritizing contributions to a TFSA or RRSP.
“Depending on your needs, there may be advantages to leaning more toward contributing to one plan rather than the other, in any contribution period,” he said.
A TFSA, for example, helps you save for any goal — from next summer’s vacation to supplementing your retirement later on — with tax-free growth.
Bannon said that means you can pull the money out at any time without having an impact on your taxable income, whether that includes capital gains on your investments or cash flow generated by dividends. And there is no requirement to repay what you withdraw.
An RRSP, on the other hand, is largely geared more specifically toward retirement savings, with tax-deductible contributions and tax-deferred growth of your investments.
Bannon said it’s possible to withdraw funds from an RRSP without paying tax before retirement in a couple of situations — such as through the Home Buyers’ Plan and the Lifelong Learning Plan — but these borrowed amounts must be paid back within 15 and 10 years, respectively.
Don’t over contribute or you could face penalties
Bannon says to keep in mind that overcontributing to a maxed-out TFSA or RRSP past a certain limit can carry penalties.
“Some investors may be caught unaware, especially if they receive a boost through employer matching,” he said.
For more information on RRSPs, visit the Canada Revenue Agency’s website.