Hands down, this is your most powerful retirement savings tool — and the deadline is sneaking up

If you have the flexibility in your budget, making a last-minute RRSP contribution by March 1 could be a very smart money move.

The tax savings offered through RRSPs can be a huge boost to your retirement plans, and that’s why you’ll want to care about them.

Hands down, the RRSP tool is the most powerful retirement savings vehicle for most working Canadians earning more than $55,000 annually, which is roughly when you hit a higher tax bracket. For the average income earner, when you add a single dollar into your RRSP, it reduces your tax bill by approximately 30 cents (or by your marginal tax rate, but in pennies, to match my analogy).

That reduction in your tax bill shows up as a tax refund for most T4’d employees, or a reduced amount of taxes owing for business owners. With this savings, you can make another contribution to your RRSP or add to your TFSA; the combo of both accounts helps save money on taxes today (you pay the taxes for your RRSP upon withdrawal usually in retirement) and with the TFSA you won’t ever pay taxes on the account because contributions are made with after-tax dollars.

Curious about how much tax you’ll save if you make an RRSP contribution? Most credible financial institutions (and experts) have online calculators that can help you figure it out.

Know what your available contribution room is

There are two easy ways to find out what you can contribute to your RRSP. First, you can go online and sign up for CRA’s My Account. Your available room will be displayed along with other pertinent tax forms — this is also good news if you’ve lost your tax forms. Second, you can dig up your most recent Notice of Assessment (also available for digital download in your CRA My Account portal) and your available room will be displayed on that document.

You’ll want to pay close attention to the available room you have so as not to overcontribute and incur a penalty — that’s kind of like lighting money on fire.

Your RRSP contribution limit each year is 18 per cent of earned income you reported on your tax return in the previous year, up to a maximum of $29,210 for 2022, and $30,780 for 2023. If you have a pension plan through work, your RRSP contribution limit is reduced.

You can skip a year and not lose out — phew!

What’s great about RRSPs is that your contribution room carries forward indefinitely. So, if you simply can’t make a contribution this year — and let’s face it, many can’t due to the higher cost of living — you canmake one next year, or the year after, and so on.

Here are a few quick ways to raise your last-minute RRSP contribution, and I’d recommend you think twice about using leverage this year.

Purge and sell what you don’t need (that high chair your kids haven’t used for 10 years or a set of end tables). File your lingering benefits claims online (this is much faster than by snail mail). Take the bonus you may have just been paid out and put it toward your RRSP. Move some of your big-ticket-item savings to your RRSP and then replenish the account when you get your tax refund.

Due to current high interest rates, RRSP loans and lines of credit used for “topping up” RRSPs are expensive and the debt might not be worth carrying. If however, your financial adviser is specifically telling you to use leverage based on your goals and risk comfort level, my advice is to pay it off as fast as possible — like within six to 12 months — and apply any tax refund you get toward the balance.

The RRSP deadline sneaks up on us quickly and having a plan is important. Your plan will help you worry less about smaller money matters, and help you focus on some of the bigger plans you have for retirement.

This article was originally published in The Star. Lesley-Anne Scorgie is a Toronto-based personal finance columnist and a freelance contributing columnist for the Star.