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RRSPs for the Contributor and Non-Contributor

11 January, 2012 / by Bryan Jaskolka

It’s the turn of a New Year and for many Canadians, it means that it’s time to start worrying about one more thing: RRSP contributions. Because the deadline of March 1 seems to be looming for RRSPs and the tax year of 2010, many think that it’s time to rush out and start pouring our money into them in order to get a bit of a tax break come April. But should you really put all that money into your RRSP? And just how much are you putting in there anyway?

While it’s true that depositing money into your RRSP will lower your taxable income and therefore, save you on taxes, you need to first determine what it will actually cost you to put the money into your RRSP. Are you going to have to use part of your 2nd mortgage or your emergency fund in order to do it? Those might not be the smartest places to draw money from to deposit into your RRSPs. And are you really going to keep that money in there until retirement? Or do you plan on withdrawing from it in order to make mortgage payments in the future? There are severe penalties for tapping into your RRSPs, no matter the reason for doing so. And while that tax break might be nice in a couple of months, it could cost you a lot more down the road.

If you’ve already done your due diligence and have been depositing into your RRSPs on a monthly basis, perhaps you think it’s time to sit back and enjoy watching the scramblers who are now trying to make that large lump sum payment. But now is the time for even the regular contributor to start assessing what’s been done with RRSPs throughout the year, and what needs to be done in order to get them ready for the new one.

Regular contributors need to start by looking at their Notice of Assessment from the 2009 tax year (those making lump sum payments should do this as well.) On this Assessment it will state the maximum amount you are allowed to deposit into your RRSP for the year. Now, if you’re making your lump sum and can afford to do so, go ahead and make anything up to that amount. But, if you’ve been having amounts deposited into that RRSP over the course of a year, you need to add up all those deposits and see what they amount to. Can you make larger payments if possible, to get the fullest tax break? Or are you already over your maximum, and able to consider stopping payments for a few months?

RRSPs are one of those things that works Canadians up at the same time every year. But knowing what you can contribute and if you can even afford to contribute, are the two biggest steps to not only understanding your RRSP, but also using them to your fullest advantage.