If you’ve eaten the last of your Valentine’s Day chocolates, you probably know that the deadline—March 1—is fast approaching for contributions to registered retirement savings plans (RRSPs).
As a busy physician, you may have been putting off investing in this tax-deferral vehicle and no doubt have lots of questions. Now, you need the scoop in a hurry.
How much should you contribute? Can you—and should you—contribute to your spouse’s RRSP? For that matter, do you really need to contribute to an RRSP at all? We’re here to help with some answers.
The clock is ticking
March 1 is the last day to make an RRSP contribution for the 2018 calendar year. Any contributions after that date will be deductible from your 2019 income.
It’s best not to wait until the last minute, of course, but if life has had you on the run, MD Financial Management has extended hours during the final days of RRSP season.
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 $26,230 (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 2017 tax return, or you can use the Canada Revenue Agency’s Quick Access service.
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 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
You must make your contribution by the March 1 deadline to claim a deduction for the 2018 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.
Alternatively, 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
You’ve been on the go. We get it. But there’s still time to reap the benefits of contributing to an RRSP. The time you spend now can really pay off in the long run.