How to Maximize Your Income Tax Refund with RRSP Contributions

The RRSP season is here. That means it’s time to familiarize ourselves with this popular savings vehicle.

RRSP is one of the most useful and most complex savings tool available to Canadians. RRSP stands for Registered Retirement Savings Plan and is a special type of investment account designed to help Canadians save for retirement. It doesn’t have to be a saving account, you can hold any kind of investments under the RRSP umbrella. This means you can keep things like cash, stocks, bonds, mutual funds and ETF-s on your RRSP account.

How the RRSP works

You can contribute to your RRSP account up to 18% of your gross income (or maximum $26,010 in 2017 tax year). If you are not able to use all your contribution room, you can carry unused contribution room forward to future years.

Tax benefits of RRSP

  1. There are two tax benefits of contributing to an RRSP account:
    Your investments in your RRSP account will grow tax-deferred. It means all the profit you make in the form of interest, dividend or capital gains are not taxed until you don’t withdraw it from your account.
  2. Also, when you make any contributions, you can claim them on your tax return and you will pay less in your income taxes.

The amount of how much you can increase your tax refund with your RRSP contributions depends on your income level. The key to minimizing the income tax you pay is to claim your RRSP contributions in your highest earning years. It means that you don’t have to deduct all the RRSP contributions you make each year, you can hold it off if you know that the taxes you need to pay on this year’s return will be less than on next year’s return. For example, if you maximized your RRSP deductions in 2017, and then you got a salary increase at the beginning of 2018, you can apply some of your RRSP deductions to next year’s return when your tax bill will be higher.

If you would like to know how much of income tax refund you can get based on your RRSP contributions, you can use our RRSP calculator. You also can determine exactly how much you need to contribute to your RRSP in order to maximize your income tax refund.

The deadline for RRSP contributions for the 2017 tax year is March 1, 2018.

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