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Reduce your 2023 income tax by making RRSP contributions by February 29th, 2024. 

Written by: Tradex

Introduced in 1957 to promote retirement savings for self-employed individuals, the Registered Retirement Savings Plan (RRSP) has become available to anyone who files an income tax return and has earned income, up to and including the year in which they turn 71 (possibly longer with a Spousal RRSP for a younger spouse).  

Contributions: Make RRSP contributions up to your available contribution room before February 29th, 2024, to reduce your 2023 taxable income and allow tax-deferred growth in your plan. The contribution room is determined by your earned income i.e., 18% of previous year’s earned income, less pension adjustment (PA), to a maximum of $30,780 for 2023 tax year ($31,560 maximum for 2024). Any unused contribution room is carried forward. 

Three primary tax advantages: Tax-deductible contributions with immediate tax relief using pre-tax dollars. Tax-sheltered investment earnings on investments are not taxed as long as they remain in the plan. Tax deferred with taxes paid on withdrawals in retirement when most have a lower marginal tax rate. 

Boost Your RRSP!

  • “There is about $725 billion of unused contribution room in Canada”- 2022 Contributions -StatsCan RRSP Loans: In tax-year 2022, only 33% of Canadians contributed to an RRSP.  Making the maximum contribution to your RRSP each year is one of the best ways to build a secure retirement, but at times, and certainly in years of above average inflation, it can be hard to make adequate contributions.  According to StatsCan, with an 18% RRSP limit, the average Canadian making $59,300 income contributes only $3,890 into an RRSP, suggesting an RRSP loan opportunity of $6,784 in additional contribution not being made.  There is an opportunity to maximize your contribution and tax refund using an RRSP loan. Whether you have unused RRSP contribution room from previous years or you would like to borrow a lump sum for just this year’s contribution, an RRSP loan can help you catch up, making sure you don’t miss out on the tax savings and investment growth opportunities of an RRSP. If you make regular RRSP contributions, you could reinvest the tax refund into your RRSP or if you have insufficient funds and would like to make additional RRSP contributions, consider the RRSP loan strategy. As shown in the example below, the potential tax savings can outweigh the cost of borrowing to make your RRSP contribution.
    Plus, the money you borrow to invest will grow together with the rest of your RRSP investments sheltered from tax as long as it’s in your RRSP. 

RRSP Loan: Alice’s Story

In scenario 1, Alice has $7,000 to contribute to an RRSP which assuming a 40% marginal tax rate would generate a tax refund of $2,800. If Alice contributes this refund into her RRSP, her total RRSP contribution would be $9,800. 

In scenario 2, Alice uses an RRSP loan to borrow $4,667 and combines it with her existing $7,000 to contribute a total of $11,667 to her RRSP in the first 60 days of the year to deduct against previous tax year. This would generate a tax refund of $4,667 which she will use to pay off the RRSP loan. While the RRSP loan is outstanding, Alice is accruing interest on the balance. Assuming Bank Prime plus 0.5% interest on the loan, if Alice repays the balance in 90 days the interest payable would be $88.60[1]

By using the RRSP loan, Alice has contributed an additional $1,867 to her RRSP allowing her to generate tax-deferred investment growth sooner. For example, if her investment grows by 8% on average per year, after 20 years, this is an additional $9,635 available for retirement income.

[1] Rate is Subject to Bank Prime change: rate of 7.7% used in this illustration.

Other Possible RRSP Uses

Are you purchasing your first home soon?
Home Buyer’s Plan: If you are planning to purchase your first home, the RRSP Home Buyer’s Plan allows you to withdraw up to $35,000 from your RRSP towards your first home. You may start repaying the amount borrowed to your RRSP within two years of withdrawal and in full amount over 15 years. A minimum of 1/15th must be repaid, or it will be included in your annual income.

For more questions about RRSPs or RRSP Loans, please contact Tradex Management Inc., at info@tradex.ca, by phone at (613) 233-3394 / Toll-free: (800) 567-3863 or visit our website at www.tradex.ca