I’ve been pretty busy with the RRSP campaign where I work. Since the beginning of January, I have been meeting with my clients to deposit their RRSP contributions.
Therefore, I guess you will probably meet with your financial advisor for your 2010 RRSP contribution in the upcoming weeks. So I thought of gathering a few RRSP facts and FAQs:
– The general rule is 18% of your declared income in 2008.
– However, if you have pension plan, you must take a look at your Federal Notice of Assessment (the document sent to you by the government after you filed your taxes. It will show you maximum contribution available for your RRSP.
– The maximum is 18% of your declared income up to $21,000.
– If you are contributing for 2010, the RRSP contribution limit is $22,000.
– You can exceed this amount by $2,000 but you will not get a tax return from this amount. Any RRSP contribution beyond the $2,000 overcontibution allowed will be penalized by a 1% tax monthly.
– The total amount of your unused RRSP contributions is shown on your Federal Notice of Assessment.
– You are allowed to contribute this amount in total and get the full tax return (but make sure to read the following point before doing so).
– You should be careful about your tax brackets and contribute as much to your RRSP in order to get the highest tax returns possible.
– To take a look at your tax bracket, you can use Ernst and Young Tax Table and RRSP tax saving calculator (it’s free!). I suggest you play around with different RRSP contributions to see how much you will receive in tax returns.
– RRSP loans are effective if you plan to pay it back within 24 months. If you are to take a 5 year RRSP loan, you are better off starting a systematic investment in you RRRSP and forget about your tax return this year.
– The interest paid on an RRSP loan is not tax deductible.
– Some strategies include an RRSP loan to maximize your tax return while it serves to pay back the loan. This is interesting when you think about your retirement (long term strategy).
– An RRSP loan can also be used for the Home Buyer Plan (HBP). You take a big RRSP loan, get the tax return and withdraw your RRSP under the HBP rules (so you don’t get taxed) to pay back the RRSP loan. Therefore, you receive the RRSP contribution tax return right away and this could help to increase your cash down or pay for other expenses (moving, lawyer fees, painting, etc.).
– If you think about your retirement and you wish to get a tax return, the RRSP contribution is the best option.
– However, if there is a possibility of withdrawing the money within the next 3-5 years for a specific project, you are better off with the TFSA.
– When you calculate the comparison between RRSP contribution vs TFSA contribution for retirement, it all comes back to the same thing.
– For more info, you can read this great article about TFSA Vs RRSP
– Almost all kinds of investments (certificate of deposits, bonds, mutual funds, stocks) are allowed.
– You are not limited to the Canadian market anymore (there used to be a 30% maximum rule for international equities).
If you have other questions, please fee to post a comment and I will add your questions and my answers into this post.
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