By Lachman Balani
TORONTO: Whether you’re just starting out in the work force, or well advanced in your retirement planning, it’s in your best interest to stay up to date on one of Canada’s best tax breaks – registered retirement savings plans or RRSPs.
A Registered Retirement Savings Plan (RRSP) is an account that one uses to help one save for one’s retirement. RRSPs help one defer their taxes while they save. Anyone who files a tax return can open an RRSP account until they turn 71, when Dec 31 of the year they turn 71 is the last day they can contribute to their own RRSP.
For everybody else, who did not turn 71 in 2012, the deadline to make contributions eligible for deductions on their 2012 income tax is midnight March 1, 2013, but the sooner one makes their contribution, the better.
All contributions into an RRSP grow tax-free enhancing the growth rate of your investments considerably.
The maximum RRSP contribution amount that can be deducted is called the “RRSP deduction limit”. Your deduction limit is found on your Notice of Assessment (NOA) from Canada Revenue Agency. Your 2012 limit would be on your notice that you should have received sometime in 2012 after you filed your 2011 tax return.
The deduction limit for this year is calculated as:
- 18% of “earned income” for the preceding year 2012, to an annual maximum of $23,820 plus the contribution limit stated on your NOA.
For instance if your RRSP deduction limit as per your NOA is say, $25,000, and your salary is as per the two scenarios below:
1: Your annual salary is $50,000 then your maximum deductible contribution room by March 1, 2013 is $25,000 + $9,000 (18% X $50,000) = $34,000.
2: If your salary is say $150,000 then you can only add a maximum of $23,820 and not $27,000 (18% x $150,000) as the former is the limit set by the government. The maximum you can contribute in this case is $25,000 + $23,820 = $48,820
A taxpayer can contribute up to the amount of their contribution limit, plus an excess contribution as long as the total excess contribution never exceeds $2,000. Any excess contribution over $2,000 will be subject to penalties. It is not mandatory to actually deduct the entire deduction limit amount on the current year tax return. If the taxpayer will be in a higher tax bracket in the following year, some or all of the contribution made can be carried forward to be deducted in a future year. The advantage of doing this must be weighed against the disadvantage of receiving the tax refund in a later year.
Also if the RRSP contribution is less than the deduction limit, then the “deduction room” is carried forward to future years.
There are many investment vehicles eligible for RRSP contributions, including savings account, GICs, stocks, bonds, ETFs, segregated funds, mortgages and more.
Now here is the question for you (GTA residents). If you answer it correctly, you can win a leather wallet worth about $30. Send your answer to: firstname.lastname@example.org
Question: What is the maximum contribution limit for tax year 2012 (i.e maximum amount you can contribute by March 1, 2013) if you have no unused room from previous years?
I will be back with the answer next week.
(For more information and clarification on how to determine your RRSP deductible room, contact your financial advisor or Lachman Balani of IDC Worldsource Financial Network at 416-902-3580 or email@example.com)