When Should you Start Contributing to an RRSP?

By Randall Orser | Investments

The annual deadline for contributing to your RRSP is coming up soon, this year the deadline falls on March 1st.  This is the time of year when many Canadians consider if they should start to contribute to an RRSP, or if they already contribute, should they add to their plan, how much and when.

When you contribute to your RRSP that amount is deductible from your total income for that year which means that you can reduce your taxes due.  In addition income earned in your RRSP such as interest, dividends and capital gains grows tax free until it is withdrawn.  So if you contribute to an RRSP early in life when you retire you will benefit from the compound growth accumulated over time.  Funds in your RRSP can also be used to buy a home through the Home Buyers Plan, or to further your education using the Lifelong Learning Plan.

If you are wondering whether to contribute to your RRSP or your Tax Free Savings Account experts say that if you are in a higher income bracket should pick a RRSP over a TFSA so you can take advantage of the tax deduction today and withdraw retirement funds at a lower interest rate in the future.  If you are in a lower income bracket and you are unsure if can keep the money invested long term it is probably better to contribute to your TFSA.  

If you are wondering when you should contribute to your RRSP experts recommend contributing small amounts regularly throughout the year instead of a lump sum at the deadline, it can sit in a savings account until you are ready to invest it.  Once you do invest it leave it there to grow tax free, it is out of sight and out of mind.  As long as you do not go over your contribution room allowed (as shown on your Notice of Assessment) you can put money in and claim the deduction that year or in a future year, this is a good strategy for people who are currently have a lower income but expect it to rise in a future year.  

If you are married or common-law you can also consider contributing to a spousal RRSP.  In this instance the higher earning spouse will contribute to the spousal RRSP and will receive the tax break which will reduce the overall taxes the couple has to pay.

If you are unsure about the best way to save for your retirement it is a good idea to consult a financial advisor.

From an article by Brenda Bouw


About the Author

President/CEO Number Crunchers® Accounting Inc. Learn how to just say stuff it to this bookkeeping thing with our 'Just Say: "Stuff It" To Bookkeeping program.