It’s RRSP season, which means most people will be scrambling to figure out if they should be contributing, what they should contribute and how to go about doing it. Here are 10 things you need to know before you start…
Start planning early
Contributions will allow you to save more for retirement but also save more in taxes. See more clever retirement tax tips will save your nest egg.
Your local bank branch only has a limited number of mutual funds and GICs where you can invest your money. If you have a growing account balance and a good idea of the market, consider a self-directed RRSP. This allows you to select your own stocks, bonds, GICs or mutual funds to invest in giving you more control over how your money will grow.
Plus, don't miss the top 10 Canadian tax myths, busted.
Get the tax break
The reason everyone starts talking about RRSPs during tax time is because it's a great way to put some money aside for the future while also enjoying a tax break. Reap the benefits of moving money aside and cutting down your overall payment.
Understand your timing
Just because you can pay your maximum contribution, doesn't mean that you should. Take a look at what you made this year compared to what you predict your income to look like next year and think about whether it makes sense to contribute the maximum now or to carry some of it over to next year.
Whatever you do, don't end up like any of these 21 notorious celebrity tax cheats.
Keep an eye on your limit
Each year, your limit will go up. Pay attention to that and be strategic if you plan on making the maximum contribution each year.
Instead of worrying about coming up with a lump sum at the end of the year, get automatic deductions taken from your paycheck. At the end of the year the money will already be invested and you won't even have noticed its absence.
To get even further ahead on your finances, check out 20 personal finance myths you shouldn't buy into.
If you already have a pension plan through your work, you're probably wondering why you should bother with RRSPs. Unfortunately, most pension plans do not cover the full cost of retirement and even top ups from CPP and Old Age security often leave you a little short changed. Contributing to your RRSP is like having a little nest egg - just in case!
If it doesn't make sense for you to make the maximum contribution this year, carry it over to next year.
In the meantime, get the scoop on what worked and what didn't work with unusual tax deductions. Read on for the most outrageous tax claims Canadians have made.
Don’t touch it
Resist the urge to make any withdrawals before retirement. Though "penalty-free" incentives like the Home Buyers’ and Lifelong Learning plans can be tempting, you will permanently lose the contribution room from making the withdrawal.
Watch it grow
One of the great things about RRSPs is that money benefits from accelerated growth within the account. Unlike a regular savings account (where interest is taxed each year), the funds are only taxed upon removal so as long as you leave them in there, they will grow unhindered.
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