RRSP Contributions

by Mike Holman

After getting some interesting comments yesterday in my post about what to do with my year end bonus I decided to do a post about rrsp contributions and the best way to do them.  Please check this page out for up to date rrsp deadline information.

One of the suggestions was to put the bonus into the rrsp and use the tax refund to pay down the mortgage. I’m not a big fan of this rule of thumb because it doesn’t necessarily fit everyone’s situation. Some people should put all their extra money into their mortgage and forget about their rrsp. Others should do the opposite and put it all into their rrsp. Most people should probably do some combination of rrsp contribution and extra mortgage payments.

Most people make rrsp contributions by setting up an automatic withdrawal plan from their bank account. Then they will recieve a tax rebate the following spring which is not a good thing because it means that you have made an interest free loan to the government. Another problem is that if you are trying to maximize your rrsp contribution, it is difficult to do with after-tax money. If you can make the contributions with your pre-tax then it will be a lot easier.

A better way to contribute is to get your company to reduce your income tax deductions at the source (your employer) by an appropriate amount so that you pay less tax on each paycheque and will not get a refund at tax filing time.

How do you do this? Most companies that have group rrsp plans will be able to accomodate this if you are contributing to the group rrsp plan. It’s best to talk to your payroll department to see what they can do.

Another option is to fill out a government form T1213 – you send it in and they will send a letter (hopefully) allowing your employer to reduce your deducted income taxes. This can be done on salary or a lump sum amount. This form has to be filled out once a year.
Obviously if you get a reduction in your income tax then you have to make sure you actually make the contribution otherwise you’ll owe quite a bit of tax the following spring.

An example:

If Sue is in the 40% tax bracket and decides to contribute $500/month then her employer will reduce the tax deducted by $500 * 40% = $200 per month. By doing this she is contributing the $500 from her gross salary, not her after tax salary and will avoid giving the government an interest free loan.

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