Last Chance for RRSP Contributions
We are fast approaching the deadline for making RRSP contributions for the 2022 tax year. As a quick reminder as to why you might want to do this...
1. Tax Arbitrage
Generally, you pay more taxes during your working years than you will in retirement. Because of this, contributing to your RRSP allows you to defer paying taxes today at your current marginal tax rate, and allows you to pay tax at some point in the future when your expected marginal rate is lower.
Eg. Let's say you make $180k/year and your marginal tax rate is currently 48.35%. Once you retire, if your marginal rate is 30%, you will have made a tax arbitrage of almost 20% for every contribution you make. Doing this over the course of your lifetime can add up to very significant tax savings.
2. Tax Deferred Growth
If you hold investments inside a non-registered account (other names could be cash account, savings account, taxable account) any interest, dividends or capital gains you receive will have tax implications. However, RRSP's are tax advantaged meaning you will not have to pay tax on any interest, dividends or capital gains that you receive, you only pay tax when you withdraw funds. Over the course of your life, by avoiding this tax drag the funds inside your RRSP can continue to compound and help grow your net worth at a faster rate.
3. Pre-Tax Contributions
When you make contributions to your RRSP, they are considered Pre-Tax contributions. Essentially, the funds you contribute to your RRSP help reduce your taxable income for the year, and you will not have to pay tax on those amounts. Because you are contributing pre-tax amounts, it allows you to invest more upfront. A larger upfront investment greatly helps to compound and increase your net worth.
4. Most Assets Were Down in 2022
You like to buy your groceries on sale, so why not get a deal on your future retirement savings? 2022 was a negative year across almost all major asset classes (not oil!) so this is one of those opportunities to pick up assets on sale.
If you have questions on whether or not you should be making an RRSP contribution this year, please get in touch with me ASAP!
Financial Advisor | CFP, B.Eng