Posted by Tim Stobbs on February 16, 2011
So are you sick of RRSP season yet? Well if so, might I propose a different point of view on it. Why is it no one talks about how exactly do you max out your contribution every year? We all know the limit is 18% of your previous years income, but that is a lot of money to have to save for most people. Heck until recently I didn’t even max out each year, so how do you do it?
Well to be honest it does get easier as you earn more. After all your basic expenses don’t change that much regardless of what income you make, we all have to eat, pay taxes and your power bill. So when you are earning more than $60K a year, saving for your RRSP is easier. Yet beyond earning more, what can a person do? Well here is my list of other ideas:
- Make it Easy. Make your contributions automatic so you don’t have to come up with any lump sums at the end of the year. You are more likely to get to your goal in little steps rather than trying for big leaps.
- Get the Free Money. If you have a defined contribution plan or group RRSP that gives you a matching amount on your contribution from your employer, make sure you are collecting every dime. Free money doesn’t happen often so fill out those forms now and get it.
- Pay Less Tax Today. Saving can be hard with your tax bill on each cheque, so if you sign up for an automatic RRSP contribution plan outside of your pension, make sure to fill out a T1213 form (deduction from source). This allows your employer to give your tax refund on every cheque rather than in one lump some at the end of the year. Depending on how tight your cash flow is that makes the savings a lot easier to do.
Ok, but how do these work to really get you to that 18% limit? Well it goes something like this. First get that free money from an employer match, so if you put in 5% and then put in 5% that brings you up to 10% in total. Then if use that T1213 form you can sign up contributing that last 8% yourself, but here is the kicker. If you are getting a 30% tax refund on that money, for example, you then only have to come up with the remaining 5.6% of your salary each month (or 0.70 * 8%). Why? Well because the remainder will come out of the money you use to be paying taxes with. So that way with only putting in 10.6% of your own salary you end up hitting your maximum RRSP contribution every year. Now isn’t that a lot easier than trying to save up 18% of your salary yourself?
So do you max out your RRSP each year? If so, any other tips for people? If not, why don’t you max out?