Happy New Investment Year! With the beginning of March, the door closes on the ability to deposit money into last year’s retirement savings accounts. It’s time to contribute towards this year. Let’s de-mystify RRSPs and TFSAs so that we can grow our wealth and reduce our taxes!
Please note: I am not a financial advisor or a tax professional. Up until recently, I was a prime example of someone who had no concept of what retirement planning involved, or what I should or should not do. Feel no embarrassment or shame if you are like me. Let this be a foundation for learning, and for building on, and I recommend seeking a professional when your situation becomes more complicated. There are different guidelines for spouses, estate planning and other special considerations.
That being said, here’s what you need to know about your retirement contributions.
RRSPs and TFSAs
The Government of Canada sets out the limits of your contributions to RRSP (registered retirement savings plans) and TFSA (tax free savings accounts). There is a maximum allowance for contributions per person, and it’s calculated using a few different criterions.
In your first tax filing year, you can contribute the lesser of 18% of your earned gross income in the previous year, OR the annual RRSP Limit. For the 2018 year, the Canada Revenue Agency has set the maximum contribution limit to $26,230.00.
Example: Sarah works at the corner store on weekends and evenings while she attends school. Last year (2017), she made $16,500. This is before any deductions, or taxes. We know Sarah made less than the maximum contribution limit, which means that she would be able to contribute a maximum of 18% of her annual earnings. She can contribute $2,970.00 to her RRSP account this year.
INCOME ALERT: If your annual income exceeds $145,723 per year, then you can contribute a maximum of $26,230.00. (No math for you!)
How to increase your contribution above the maximum
If you did not contribute 18% of your earnings (up to the maximum contribution amount) each year that you earned an income, you can carry forward the remainder. Simply calculated, if your contribution allowance is not met, the difference of what was not used can be carried forward. Your tax return or Notice of Assessment should indicate the remaining contribution limit available.
Things you need to know
- Expenses cannot be included in your contribution calculations. Any amounts that you paid as administration fees, brokerage fees, interest paid on borrowed money to make the contribution, and capital losses cannot be considered as part of your contribution amount.
- Be careful when calculating your contributions! Contributing more than the allowable amount can result in being taxed. You can request special considerations if the situation warrants it.
TFSAs began in 2009 with the intent to provide Canadian residents a vehicle to save money without being taxed on the interest (like investment income and capital gains). You do not need to earn an income in order to contribute to a TFSA. Contributions are not tax deductible, however the income is not taxable (in most cases). Withdrawal from a TFSA does not count as income, nor will you be taxed if you withdraw funds prior to retirement.
Again, CRA sets out the annual limits for contributions, but the limits are not dependent on an income. For the year 2018, you can contribute a maximum of $5.500.00, and like the RRSP contribution amounts, you can carry forward unused credit each year.
- Again, watch your limits, as over-contributing can lead to being taxed.
- Check to make sure your investment is “qualified”. Tax may apply otherwise.
- TFSAs are only available to Canadian residents.
- While you can use foreign funds, it’s advised to check out the rules in closer detail if you wish to go that route.
For more information directly from the CRA, you can start here.
I trust that the information above simplified some of the mystery about contributing to your future self. There are other programs that help you save towards a new home, or your child’s education, but we need to start by taking care of ourselves, and then moving on.
Keep an eye out for ways to save for your RRSP and TFSA limits. In the meantime, take a look at your income amount last year, and figure out your maximum contribution for the year. There are creative and innovative ways to save money, invest in future you and/or pay down that debt!