March 1st is the contribution deadline for 2017 RRSPs

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Registered Retirement Savings Plans (RRSP) were developed in 1957 as an amendment to the Income Tax Act. It was introduced as a way for individuals to save for future retirement income, similar to members of registered employer-sponsored pension plans. We tend to look at the immediate benefit the tax deduction, but the long term benefits of growing your assets in a tax sheltered plan may be just as valuable. Don’t pass up the chance to utilize this tax deferring vehicle as it’s intended use as a pension. You can contribute 18% of your employment income up to a 2017 limit of $26,010.00.

Consider an investor with a Marginal Tax Rate (MTR) of 30%. If they contribute $5,000.00 annually to their RRSP for 30 years:

Annual Contribution

 $      5,000.00

Rate of Return

5.00%

Market Value after 30 years

 $ 332,194.24

The power of compounding can also make a difference to your RRSP. Consider contributing monthly instead of annually. This strategy is called dollar cost averaging and is an effective way to buy into the market at different cycles.

Monthly Contribution ($5,000.00/12)

 $          416.66

Rate of Return

5.00%

Market Value after 30 years

 $ 346,768.88

At a 30% MTR assuming no other tax considerations would result in a $1,500.00 ($5,000.00 x 30%) deduction. If the investor also added this amount to their RRSP it would create further savings:

Annual Contribution

 $      6,500.00

Rate of Return

5.00%

Market Value after 30 years

 $ 431,852.51

Consider again contributing monthly and the power of compounding increases the value even further.  

Monthly Contribution ($5,000.00/12)

 $          541.66

Rate of Return

5.00%

Market Value after 30 years

 $ 450,801.21

*The tables shown here are used only to illustrate the effects of the compound growth. Rates are not guaranteed. The rate of return used is for illustrative purposes only.

Spousal RRSP contributions are another strategy for growing and splitting retirement income for couples. The spousal RRSP allows the higher income earning spouse or common law partner to contribute to the lower income earning spouse's RRSP. The higher income earner receives the tax deduction. When it comes time to withdraw the lower income earner would claim the income.

 

A RRSP contribution can also increase your Child Tax Benefit. The amount and eligibility for the benefit depends how many children you have under 6 years of age and your Family Net Income. Check out the next article on How to Increase your Child Tax Benefit with an RRSP Contribution.

 

Find out if you are utilizing tax efficient strategies for your situation by emailing lfothergill@brittaingroup.com or call 519-756-7171 our office.

 

Lindsay Fothergill B.A., CFP graduated from the University of Guelph with honours in 2006 and began working at Brittain Group Financial Services the same year. Lindsay pursued financial planning as a career and in 2012 and became a Certified Financial Planner. Read more about our team here.

 

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