Wow! February already and the RRSP purchase deadline for 2013 is fast approaching. This deadline for those under 69 is March 1 this year, 60 days after the end of the tax year.
RRSPs can save you money by deferring the taxes that would be owed on the amount of RRSP purchased. Simply put if you are in a 40% tax bracket, a $1000 RRSP purchase will save you $400 in taxes for that tax year. Purchased before February 29, the tax savings can be used in the previous tax year. There are other considerations depending on the individual or family circumstances, but overall that’s the drift.
Most of us are divided into "Working Guy” (or Gal) who trudges off to work each day, “Family Guy” who deals with life’s little emergencies, and occasionally “Tax Savings Guy”. Now Tax Savings Guy usually appears for only one week a year, scrambling at the last minute to squeeze what little tax advantages he can find to ease the cost of living and maybe even save a little something for retirement.
Many will tell Tax Savings Guy that this is the time to buy RRSPs. Buy Now…Save Taxes…Maximize Your Tax Return!! In fact this is reinforced at every bank and credit union. They are busy right now advertising special rates for RRSPs or even RRSP loans. Last Chance to Save! Borrow Money to Save Money! Rates so low it’s almost FREE!!
So how about that? Is it RRSP Season? Should we buy now to save on last year’s taxes? I say no. Purchasing now can actually HURT you financially.
Now, you should always buy RRSPs if it is beneficial to your individual tax situation, such as in a higher tax bracket. How much to purchase would be determined by where your income is within that bracket and by the eligible RRSP amount listed on the bottom of last year Notice of Assessment from the Canada Revenue Agency (CRA). However, it is not always wise to borrow now and pay all year for last year’s loan. Tax Savings Guy would be better off ignoring last year and focusing on being around more this year. The money that would have been set aside to pay off last year’s loan could instead purchase NEWRRSPs for the present tax year.
Knowing your RRSP eligible room, Tax Savings Guy can arrange an automatic withdraw from each paycheque to make RRSP purchases. This way he is ahead of the game. He is purchasing this year’s RRSP as well as value averaging the purchase of any mutual fund, stock, or GIC that is being purchased. But the big score is he is not paying interest. As well, the additional tax refund can be used for anything and not just to repay a RRSP loan such as paying down mortgage or credit card debt. Granted he could give the money to Family Guy who never seems to have enough. The point is money is saved, not borrowed. Interest is made, not paid.
So forget about the hype. Remember… RRSP Season is All Year Long!! Retirement Guy will thank you for it.