As a physician, you may have been putting off making your RRSP contributions because you’re not quite sure if it’s the right strategy for you in 2020. You may still have questions, but the deadline — March 1, 2021 — is fast approaching.
Should you contribute? How much? Can you — and should you — contribute to your spouse’s RRSP? We’re here to help with some answers.
Consider the disruption of 2020
The year has been different, and your ideal financial planning strategy could look very different too. This includes your RRSP strategy. To best support your financial goals, it’s important that you get the right advice — advice that considers the intricacies of your career in medicine, your personal circumstances, and the current environment. An MD Advisor* can help with that.
The clock is ticking
March 1 is the last day to make an RRSP contribution for the 2020 calendar year. Any contributions after that date will be deductible from your 2021 income.
The buck stops where?
How much can you contribute to your RRSP? Generally, it’s 18% of your previous year’s earned income plus any unused contribution room, up to a maximum of $27,230 for the 2020 calendar year (if you have earned income to support this). “Earned income” includes employment earnings, self-employment earnings, and certain other types of income like rental income, with some employment expenses and business or rental losses subtracted.
If you’re incorporated and pay yourself a salary, you create RRSP contribution room. But if you pay yourself dividends, they don’t count as earned income. As you plan for next year, your accountant can help you decide on your compensation strategy in your corporation.
If you haven’t contributed the maximum amount in previous years, you can invest more than your annual maximum, until you reach your total contribution limit. You can find your exact limit on the notice of assessment you received after filing your 2019 tax return.
Keeping it in the family
Does your spouse earn less than you do? If your spouse is in a lower tax bracket, a spousal RRSP may be a good idea.
Here’s how it works. You contribute to your spouse’s RRSP, and you — the higher income earner — take the tax deduction. (Note that these contributions reduce the amount you can contribute to your own RRSP.)
When your spouse withdraws the money in retirement, he or she pays the taxes on it instead of you — which will most likely reduce the overall tax liability for the household.
Note that you can only contribute to your spouse’s RRSP up to the end of the year in which he or she turns 71. But if you’re older than your spouse, the spousal RRSP can extend your contribution period and the tax deductions.
Don’t forget, though, that your total contributions to your own and your spouse’s accounts can’t exceed your contribution limit. Your spouse’s limit, though, is not affected.
No need to invest hastily, but don’t leave your RRSP assets idle for too long
You must make your contribution by the March 1 deadline to claim a deduction for the 2020 taxation year, but you don’t have to invest the money right away. You can park cash in your RRSP account while you consider your investment strategy.
You can invest your RRSP contributions in myriad ways, including individual stocks, mutual funds or exchange-traded funds (ETFs) where interest income, capital gains and dividends can accumulate and grow, tax-deferred. So don’t let your hard-earned dollars sit in cash for too long.
You can set up automatic recurring contributions and accumulate funds in your RRSP during the year. You can invest this money as you go, gaining the advantage of tax-deferred earnings on the investments.
It’s in your interest ... to consider debt
If you have lots of debt, such as a mortgage or a student loan, your overall strategy should involve reducing the interest you’re paying.
But ask yourself whether paying down the debt will save you more money than contributing to your RRSP. This depends on several factors. For example, you should compare the interest rates you’re paying with the return you’ll likely get on your RRSP investments. It also depends on your age, your tax bracket and, most importantly, your financial goals. A financial advisor can help you sort this out.
But remember: You can always use the tax refund from your RRSP deduction to pay down debt, and reap the benefits of both.
There’s still time to determine if a RRSP contribution is right for you this year. Contact an MD Advisor — beyond finding the ideal RRSP strategy for you, she or he will review all strategies and opportunities (corporate accounts, spousal RRSPs, and TFSAs to name a few) to best achieve your financial goals.
* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.