An RSP is an account that allows you to defer tax into the future, which means you have more money now to grow your nest egg. The money you contribute into your RSP can be deducted from your taxable income, which is why many people will receive a refund from RSP contributions they have made. When you’re old and grey and decide it’s time to pull the money out of your RSP you will be taxed on the amount withdrawn in a given year. This can be beneficial if you are in a higher income tax bracket now than you will be when you retire and need to pay tax on your RSP withdrawals.
It’s easy to forget about the RSP during the year, and if you did, that’s okay, I have five simple tips that will help you get your retirement savings ready!
- Use your contributions to decrease your taxes payable, or increase your refund. Your T4 should be in your mailbox by the end of February at the absolute latest, and you have until March 1st to make contributions to your RSP. If you don’t think you’ll get your T4 in time consider using your last pay stub’s year-to-date income and taxes paid to estimate what you might owe, keeping in mind that the tax rates have changed this year. Calculators like Simple Tax will allow you to play with the RSP contribution so that you don’t end up owing!
- You don’t have to claim all your contributions. If you’re a rockstar and started contributing to your RSP when you were young and still in a low income tax bracket, that’s okay… you don’t have to claim all of your contributions in the year you make them. You can carry them forward until you’re in a higher income tax bracket and could benefit more from the tax deduction. The only caveat is that you have to use up your contributions before you turn 71.
- You can use your RSP for school or a home. With the TFSA becoming another great tool for Canadians many individuals are electing to use their RSP for home ownership through the Home Buyers Plan (HBP), or post-secondary education through the Lifelong Learning Plan (LLP). Both of these programs are flexible and available to Canadians should they choose to pursue them.
- You can invest within your RSP. Putting money into your RSP is great, but you need to make sure that your money is working for you in the most effective way possible. Based on your risk tolerance and time frame investing in your RSP could help you increase your wealth. RSPs are vehicles that allow you to purchase stocks, bonds, GICs, Index funds, and ETFs so that you can grow your money tree! Make sure your money is working for you while it’s sitting in the RSP, banks like Tangerine have well-diversified, low cost mutual funds that are great for many types of investors. With investment fees a hot topic this year following new CRM2 regulations, Tangerine’s funds are particularly attractive as they have fees that are about half the industry average. This can translate to big savings over the long-term.
- Consider an RSP loan. An RSP loan may be a good option for you if you’re looking to put a large lump sum into your RSP to maximize your contributions. Provided you invest the money within the RSP and earn a conservative rate of return, with interest rates as low as they are you could end up ahead.
Remember: You have until March 1, 2017 to contribute to your RSP and use those contributions for the 2016 tax year!
Note: this post was sponsored by Tangerine, however the views and opinions expressed are entirely my own.