Be Sure to Make Your RRSP Contributions

The deadline for making your final RRSP contribution for the 2013 tax year is quickly approaching – Monday, March 3.

There are many benefits to making contributions to RRSPs and PRPPs, not the least of which is getting a larger tax refund so you can put away the most money possible to work for your own future. Consider these pluses:

• RRSP/PRPP contributions result in an immediate tax deduction for the principal, which reduces your tax bill in the current year, as well as your net income on Line 236.
• By reducing your net income, you will limit reductions of tax credits or social benefits you may be entitled to, including Employment Insurance.
• RRSP/PRPP deposits accumulate and grow on a tax-deferred basis (that is, earnings within the plan are not taxable until they are removed from the plan).
• Withdrawals of RRSP funds in a year when your marginal tax rate is lower will result in a net tax saving.
• Money may be borrowed on a tax-free basis from your RRSP to fund the purchase of a new home under the Home Buyers’ Plan or to finance post-secondary education under the Lifelong Learning Plan.
• Starting at age 65, RRSP pensions may be split with your spouse to reduce the taxes payable on the receipt.
• PRPP pension income can be split with your spouse regardless of your age.

How Much Can You Contribute? Each year that you have earned income, you create RRSP/PRPP contribution room which you can use the following year. The contribution room you generate is the lesser of:

• 18% of your earned income for the prior year, and
• an indexed annual dollar maximum ($23,820 for 2013),

less any pension adjustments (PA) from your employer-sponsored plans in the prior year. This is shown on Box 52 of the T4 slip and ends up on Line 206 of the return.

New for 2013 – Your contribution room will also be reduced the following year if your employer made to a PRPP on your behalf. These amounts will be shown in the “employer contribution amount” box on your PRPP receipts and must be reported on line 205 of your return.

Excerpted from Jacks on Tax. © Knowledge Bureau, Inc. All rights reserved.