It's RRSP season - are you ready?

Image by 3D Animation Production Company from Pixabay

The first two months of any year are often referred to as “RRSP” season. This is because you can make contributions to your RRSP in the current year – but have them actually count towards the previous year’s contributions. If I’ve lost you, don’t worry – I’ll explain more below!

What is an RRSP?

An RRSP is short for a registered retirement savings plan. The government introduced them in the 1950s as a way to encourage Canadians to save for their retirements. As many places of employment don’t offer a pension anymore, RRSPs have become more and more important over the years.

Why would I want to contribute to one?

There are several reasons to contribute to an RRSP:

You are saving for your future. Presumably, you don’t want to work your entire life – so putting money in an RRSP ensures you have money waiting for you when you retire.
You can use your RRSP contributions to cut down on your tax bill. Any money you contribute to an RRSP is EXEMPT from taxes. For example, you made $40,000 and put $2000 into an RRSP. The government will then consider your income to only be $38,000 for the year.
You aren’t taxed on any growth in your RRSPs until you take money out. If the stock market is going crazy, don’t worry – you won’t be hit with a huge tax bill! Your RRSPs grow tax-free.

What are the rules about contributing?

For 2021, the maximum amount you can contribute to your RRSP is $27,830. However, unless you’ve made a very high salary, you likely won’t have this kind of contribution room. You “earn” contribution room every year you are working – and the maximum amount you can contribute is based on your salary. The good news is that your contribution amounts carry over – so if you have years with a lot of expenses, you can contribute less to your RRSPs and make up the difference later.

You can put a lump sum into your RRSP, but most people prefer to make monthly, automated contributions to spread out what they are putting in, and ride out any market volatility. For your 2020 RRSP, you can make a contribution any time during 2020 or in January or February 2021.