What’s Your Optimal RRSP Contribution For 2020?
Right now, millions of Canadians are doing the annual scramble to get their Registered Retirement Savings Plan (RRSP) contributions finalized ahead of the March 1st deadline. It’s worth the effort, not only in terms of saving for retirement, but because of the potential to reduce their taxes.
For the 2020 tax year, the right strategy could produce enough of a tax deduction to drop your income down so that you fall into a lower tax bracket. Do you know how much you need to invest in your RRSP to do this?
It’s based on your marginal tax rate, so you first need to calculate your income. If you’re self employed, you already have this information. If you’re salaried, you could wait until the end of February when you receive your T4 slip. However, that won’t allow much time to finalize your RRSP strategy by March 1st.
Estimate your salary using your final pay stub from December. Add in any other taxable income, such as a side job, and capital gains or dividends from investments. Now you are ready to estimate the amount of tax you must pay and then lower that bill.
Your taxable income, minus allowed deductions, will determine your marginal tax rate, or the highest tax bracket into which your income falls. One of those allowed deductions is your RRSP contribution.
Your Financial Advisor can help you calculate how much you must contribute to lower your taxable income so that you are taxed from a lower tax bracket. It can save you a considerable amount of money.
However, if you are expecting your salary to increase in the near future, another tactic is to carry forward your RRSP contribution this year (check your Notice of Assessment to determine how much room you have). You can pay into your RRSP but then defer claiming all, or a portion, of the tax deduction. This could offer some important tax savings in a future year, on income that you expect to fall into a higher tax bracket.
Use your RRSP to save for your retirement, while your contributions reduce your taxable income today. Ask your Financial Advisor how to optimize your RRSP and tax strategy this year.
Click here for an Interactive Calculator to check your expected tax savings.