It’s that time of year! We’re quickly approaching the registered retirement savings plan (RRSP) deadline for the 2022 tax year which is MARCH 1st. A RRSP is a great tool for putting money towards your retirement savings goal.
But you may be on the fence wondering if a contribution makes sense for you. Many people ask what’s the point if I have to pay taxes in retirement years when I take the money out of my RRSP? Great question, and it may still be favorable from a tax perspective if you’re going to be in a lower tax bracket in your retirement years than you are in your working years. Here’s a quick example to illustrate what I mean.
Let’s say Lucy is currently in the 30% tax bracket in her working years. She makes a RRSP contribution of $1000 and gets a refund at her rate which amounts to $300. Fast forward to retirement years when Lucy finds herself in a lower tax bracket of 20%. When she goes to pull out $1000 from her RSP she will be subject to $200 tax rather than the $300 in her working years. She has saved herself $100, or 10% in tax by making the contribution in her higher earning years. (Keep in mind this is a simplified example and of course would depend on your full tax picture). But it illustrates that despite having to pay tax later on you might be in a position where you saved yourself some tax by doing the contribution, and in the meantime you also allowed the money to grow tax sheltered in your RRSP account.
So if contributing to an RRSP sounds like the right option for you – get on it before March 1 2023!