RRSP contributions are one of the most effective ways to reduce your current tax bill while saving for retirement. Every dollar you contribute reduces your taxable income, potentially moving you to a lower tax bracket.
Your RRSP contribution limit is 18 percent of your previous year earned income, up to the annual maximum, plus any unused contribution room from previous years. You can find your available contribution room on your most recent Notice of Assessment from the CRA.
The RRSP contribution deadline for the current tax year is March 1st of the following year. Contributions made up to this date can be claimed on your current return, providing immediate tax relief.
Consider the timing of your contributions. If you expect your income to be higher next year, you might contribute this year but defer claiming the deduction until next year when it will provide greater tax savings.
Spousal RRSPs can be an effective income-splitting strategy. Contributions are made by the higher-earning spouse but accumulate in the lower-earning spouse account, potentially reducing overall family taxes in retirement.
Be careful not to over-contribute. You can exceed your limit by $2,000 without penalty, but contributions beyond that are subject to a 1 percent monthly penalty tax on the excess amount.
First-time home buyers can use the Home Buyers Plan to withdraw up to $35,000 from their RRSP tax-free to purchase a home. The withdrawn amount must be repaid over 15 years. Similarly, the Lifelong Learning Plan allows withdrawals for education expenses.
Remember that RRSP withdrawals in retirement are taxed as income. Consider your expected retirement income and tax situation when planning your RRSP strategy. Working with a financial advisor can help you develop a comprehensive retirement savings plan.