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Tuesday, April 25, 2017

How Do You Max Your RRSP?

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:

  1. 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.
  2. 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.
  3. 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?

Comments

4 Responses to “How Do You Max Your RRSP?”
  1. Another great way that most people don’t think about are IN KIND contributions. Let’s say you have some investments that are doing great outside of your RRSP. You can contribute them to your RRSP “IN KIND”. So let’s say you were smart and bought 200 shares of BCE way back in 2009 because it was so cheap at $25 (cost: $5000). You love the fact that you are collecting a 9%+ dividend and you the stock has climbed to $36. You can contribute those 200 shares IN KIND to your RRSP and get an RRSP contribution tax slip for $7200!

    A few notes on this: CRA will say that you have deemed to have disposed of your BCE shares when you transferred them into your RRSP. This will create a capital gain of $2200 and you will have to include half of this in your 2011 taxable income.

    NOTE: If you transfer in a stock at a loss YOU DO NOT GET TO USE THE CAPITAL LOSS AGAINST CAPITAL GAINS INCOME.

    This is VERY easy to do. Call your broker/discount broker/financial advisor/ and give them instructions to transfer the investments IN KIND to the RRSP. There is no commissions and there should be no admin fee.

    Once you get your juicy tax refund trow that back into the RRSP or buy another investment non-registered in the hope of having similar success.

    Remember RRSP contributions are not always the best idea. If you are young and have 30+ years to save you may be better off using TFSA’s for now. If your income is below $84,000 you may be better off not making RRSP contributions.

  2. Traciatim says:

    I don’t max out my RRSP every year but generally that’s because the rule of thumb is that 10% of your income should go to retirement savings (if you start early enough). 9.9% already goes in with the CPP and I am putting another 12% with my 6% matched employer plan. That’s already enough, especially since I have a mortgage that I would hope I would be done paying by the time I’m 45 or 50. If all that goes as planned then retirement should be a fairly simple move.

    Plus, if I go for more savings at some point I would probably do it in a TFSA anyway.

  3. dave says:

    re Frank’s comment “If you are young and have 30+ years to save… ”

    Remember that this site is primarily frequented by people planning to retire unusually early, few of us (if any?) have a mindset to be working and saving for our retirement for another 30+ years.

    Also, thanks for that info on the “in kind” stock transfer I did not know about that…

  4. Canadian Dream says:

    @ Frank,

    Oh, good point. I forgot to add that to the list. Thanks.

    @Traciatim,

    Depending on your goals you are correct that you don’t have to max out your RRSP. Also depending on your tax planning the TFSA might be better than the RRSP anyway.

    @dave,

    True, I don’t think a lot of my readers are planning on retiring by mid-50, but some could be looking at it since they are already past 45. After all a lot of the advice on this blog can be applied to a regular retirement as well.

    Tim

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