Should I Contribute More to My RRSP This Year?

The RRSP emails started coming really early this year, so if you’ve already wondering “Should I contribute more to my RRSP?” because you’ve received multiple emails from your financial service providers telling you to contribute, or to (don’t do this) take out a loan to top up your RRSP this year, same here pals.

If you’ve avoided it so far, we’re coming into Peak RRSP Season, because the deadline to contribute to your RRSP and have your deductions count for your 2017 taxes is coming up on March 1st.

(Not sure what the heck I’m talking about? Check out this primer on Registered Retirement Savings Plans (RRSPs) for millennials.)

That means that over the next week and a bit, you’ll probably get at least one marketing message to contribute to your RRSP.

And hey, I am all for saving for retirement! That is a good thing! And way better than many things that get marketed to us on a daily basis!

But there’s no need to panic-contribute at the tail end of the year to your RRSP, and there are way better and more reasonable ways to do it. However, it’s not easy to resist all the messages that try to convince you that you should put more money into your RRSP, and that it’s in your best interest to do so omg-immediately-right-now.

The biggest one, by far is…

“Save money on your taxes!”

Whether you’re being pitched on contributing more to your RRSP, or borrowing money to put into an RRSP (again, don’t), the big perk everyone’s selling right now is that if you make your contributions on or before March 1st, you’ll get to claim them on your 2017 taxes when you file them (which you can do easily online, FYI).

Which is true! Here’s how that works.

When you contribute to your RRSP from your paycheque, that money has (usually) had tax taken off of it by your employer. But the big benefit of an RRSP is that you contribute with pre-tax dollars—so when you file your return, the government gives you back the taxes you already paid on that money.

If you pay a marginal tax rate of 30%, and you added an extra $1000 to your RRSP, it means you’d get an extra $300 back on your taxes. That’s how contributing saves you money when you file.

What you need to know before you put money into your RRSP

So yes, everything those marketing emails are saying is true, and saving for retirement is a good thing. So is getting money back on your taxes! (Some personal finance nerds will fight me on that, but whatever, tax returns can be a happy thing.)

But your RRSP contributions shouldn’t be taken lightly, and here’s why.

A recent study by BMO found that Canadians are withdrawing money from their RRSPs to cover expenses. A chunk of those are withdrawals done under the Home Buyers’ Plan, or the Lifelong Learning Plan, both of which you can use without a tax penalty. But if you’re withdrawing money to cover a vacation, or your regular bills?

Oh boy will it ever cost you.

When you withdraw money from your RRSP, it counts as income, and will be taxed like income. Remember how you contributed $1000, and got $300 back because your marginal tax rate was 30%? That works the same way in reverse.

If you take out $1000 from your RRSP, and your marginal tax rate is still 30%, you’ll need to pay $300 of that in taxes—so you’ll only end up with $700.

That’s a simplified example, and in reality, the penalties and withholding amounts will depend on a lot of different factors, including how much you’re trying to withdraw.

So if you’re not 100% sure that you can leave the money in your RRSP for the long-term, don’t put it in just to save money on your taxes this year. You’ll have to pay that money right back if you withdraw it next year.

Here’s what you can do instead

Listen, there’s no need to panic. The cool thing about taxes (lol) is that they happen every year (lol)!

In all seriousness though, if you’re realizing that you’d love to get a chunk of money back when you file your taxes, and that you could probably handle saving more for retirement without totally destroying your budget, that is an objectively great thing to realize! It just doesn’t mean you have to do it, or come up with the money, in the next week.

You can contribute to your RRSP all year round. So instead of taking this “RRSP season” as a wakeup call to try to find thousands to save in seven days, think of it as a chance to review your monthly money situation. Figure out how much you’re spending, how much you’re saving, and bump up your monthly savings contributions to your RRSP. (Bonus points if you finally start investing that money!)

By the time this all happens again next year, you’ll be sitting on thousands of dollars you’ve already contributed, and you won’t need to panic-contribute to score some money off your taxes, or to reduce the amount you owe.

PS. If you’re saving for retirement, the TFSA is another great option. You contribute with after-tax dollars, so there’s no tax-season madness, but it’s a legitimately powerful account. 

And a quick word about borrowing…

So OK, I’ve snuck in warnings against borrowing to contribute to your RRSP twice so far in this post, but here’s the slightly expanded explanation of why that’s probably not a good idea for most of us.

Borrowing money to invest it (in your RRSP or otherwise) is Finance 501.

It’s an advanced maneuver, and unless you’re a finance pro, or working with one you really trust, you’re better off not messing around with borrowing to top off your RRSP.

If it’s something you mapped out as part of a financial plan? Great.

If it’s something you’re considering because you got an email about it a week or two before the contribution deadline? Nope nope nope. (You can always do it next year after some thought if you’re thoroughly convinced it fits for you… but please be careful, and when in doubt, just don’t, OK?)