RSPs—the clock is ticking…
If you plan to contribute to your RSP for the 2014 tax year, the time to do so is now. Monday, March 2 is the 2014 deadline.
To recap the RSP basics:
- You can contribute up to 18% of 2013 earned income, to a limit of $24,270.
- You can increase that limit by any unused contribution room earned in previous years.
- Your taxable income is reduced by the amount of your contribution.
Watch out for penalties
There is a penalty for over-contributing. To avoid it, make sure you reduce your limit by the total of any registered pension plan contributions for the year. That amount is called a pension adjustment (PA) and is found on your T4 slip (Statement of Remuneration Paid).
If you’re at all unsure of what your total limit is, there’s an easy way to find out. Just consult the Notice of Assessment you received from the Canada Revenue Agency for 2013. At the bottom there is a box entitled “Your 2014 RSP/PRPP Deduction Limit Statement.” The last line of the box tells you what your limit is for 2014.
Remember also that an RSP contribution will reduce the tax you have to pay now—but it won’t let you avoid paying tax on it forever. When you eventually withdraw money from your RSP you have to pay tax on it at your marginal rate. So it’s best to think of an RSP as allowing you to defer taxes, rather than avoid them altogether.
Tax season—the clock is also ticking…
As we mentioned in last month’s Oaken Update, tax season is coming. We recently mailed out most of the receipts you’ll need, so keep an eye on your mailbox. We’ll send out RSP receipts for the first 60 days of 2015 by the end of March.
We all want to reduce our tax as much as possible; and maximizing your RSP contribution is a great way to do that. Remember, though, that there are lots of other ways to reduce your taxes. From moving expenses to medical expenses, from charitable donations to transit passes…you may be able to claim a lot more deductions than you thought.
When in doubt, consult
If you’re not sure what your deductions are, it’s advisable to read up on them now. There are lots of sources available to you, from the Canada Revenue Agency website to articles in major newspapers.
Most people have fairly straightforward finances, so it’s not hard to find out what you can claim. But if your situation is more complex, it may be worthwhile consulting a tax professional. They can give you advice that could cost a lot less than the amount you would have otherwise had to pay.
TFSAs—fortunately, there’s no clock at all!
Since we’re on the topic of RSPs and taxes, we really should mention TFSAs again. The eligible amount for TFSA contributions in 2015 is $5,500, plus any unused contribution room from previous years.
We highly recommend TFSAs, because they are a great savings and investment vehicle for just about everyone.
One of the great advantages of TFSAs is that there’s no contribution deadline. So unlike RSPs, you don’t have to scramble to get your contribution in by the beginning of March.
The other thing we like about TFSAs is that you don’t have to worry about being taxed on withdrawals in the future. Whatever you earn in them is yours to keep, along with the principal. The government will never touch it.
So, now that you’ve rushed out and made your RSP contribution, it’s time to reflect a bit on your overall financial plan. Here’s some food for thought to help you along.
- The Rising Power of the TFSA: Jonathan Chevreau compares TFSAs and RSPs, and outlines why TFSAs are gaining favour
- How Low Interest Rates Have Changed Retirement Planning: Jonathan Chevreau again on low interest rates and what they mean for savers
- Is a Free Tablet Worth Switching Banks for? Andrew Seale of moneywise magazine takes a look at the tactics some financial institutions use to entice customers