Save, sell, borrow, work: How to take your RRSP top-up over the top
It’s that time of year again when you can top up your RRSP by March 1 and have the contribution count toward the previous year’s taxes.
The first reason Canadians prioritize RRSPs is to help save money on taxes today (do note that you’ll pay taxes when you withdraw the RRSP money in retirement). The tax saving typically shows up in the form of a refund which should be in your bank account this spring, if you’re a traditional T4’d employee and you file on time. And if you’re self-employed, you’ll benefit from a reduced tax bill.
The second reason is to ensure that your retirement nest egg will meet your financial needs in your golden years. If the ultimate ideal size of your nest egg is a mystery to you, book in with a financial adviser to craft an estimate. You can then work this back to determine what you need to save and invest every month, to close the gap between your current savings and the value of your future nest egg.
Though preliminary data shows there may be fewer Canadians rushing to the bank this year for RRSP contributions in light of continued economic uncertainty, it still makes sense for many Canadians who have stable income over about $55,000 per year. (If you don’t earn that much, prioritize your savings toward a TFSA instead.)
If you want to make a contribution, and you have the available room within your RRSP (check your CRA My Account portal, review your most recent Notice of Assessment and your available room is shown on the line item that reads “Available contribution room for 2021”), here are a few techniques to gather up the money.
Put some of your pandemic savings toward it
Stats show Canadian who were not significantly impacted by job loss or income reductions amidst the pandemic are sitting on a tremendous amount of savings at the moment. According to Bank of Montreal, savings topped over $150 billion by the end of last year; for context, that’s a whopping pile of money. Thus, your first option to fund your RRSP top-up is by way of this savings. It’s still a good idea to keep an emergency reserve fund of between three and six months’ worth of essential expenses in cash, so factor that into the amount of contribution you can afford to make. Note that taking out money from an RRSP has some drawbacks (namely taxes, foregone interest and returns, and you don’t get your contribution room back), so you’ll only want to invest money for the long-term.
Raise extra money by selling something
When was the last time you used that Pilates machine, tried on your wedding dress, drove the second vehicle that’s rusting away in your alleyway or listened to music on the speakers you’ve never hooked up since moving to the city? Selling what you don’t need is a super way to raise a bit of money and declutter your space. What’s trending in the second-hand economy at the moment is fitness equipment, ergonomic office chairs and desks, tablets, outdoor adventure gear, computers and home-renovation items. I recently had a student sell a box of cords — Ethernet cables and telephone wires — for $30 in less than two hours. She put that money into her RRSP.
Evaluate if a loan, in moderation, is right for you
Rates are historically low at the moment, which makes RRSP loans far more affordable than in previous years. The rationale for using debt for your RRSP is to invest it wisely in diversified assets that will grow greater than the cost of the loan. The loan can also amplify how much you can afford to contribute, which translates into greater tax savings. My advice is to compare lenders’ repayment terms; the best practice is to have the loan paid off within 12-18 months, which for most people means applying their tax refund, if you get one, onto the loan balance. In all cases, you’ll want to incorporate the loan payments within your monthly budget to ensure you can afford it.
If you have a bad track record with debt, don’t borrow to invest in your RRSP.
Use a work bonus
Congratulations if you’re getting a bonus. You may have the option to allocate this money into your workplace Group RRSP. And if not, and they pay the whole thing out, you can still make a contribution to your traditional RRSP, if that feels right for you. If you have expensive consumer debt, however, it probably makes more sense to apply this money there.
Do you have the opportunity to make a bit more money this month? Take it.
Take on an extra shift, file your benefits claims, get paid back from your sister, complete your freelance project. If you can make some extra money, use it toward your RRSP top-up.
If the pandemic was financially unkind to you, and you're struggling with a bit of RRSP season FOMO, I have good news for you. Your available contribution room is going to carry forward (it’s 18 per cent of your income, to a limit of $27,830). That means you’re not going to lose it, so you can contribute in a future year when your finances are in a stronger position.
As always, slow and steady monthly or bi-weekly contributions timed to your paydays are a great way to contribute to RRSPs, and avoid the last-minute RRSP season rush. If you have questions about whether RRSPs are right for you, book a meeting with a qualified financial adviser.
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.
