Monday, March 1 was your final opportunity to make an RRSP contribution to deduct on your 2009 income tax return. If you missed that deadline, it's not too early to start thinking about next year. Here are some things to consider:TAX SAVEDHow much tax can you save by contributing $1,000 to your RRSP?The answer depends on which of the four tax brackets you find yourself in for 2009. In the top tax bracket, you would save $440 (using Saskatchewan tax rates). You are in the top bracket when your taxable income is over $126,264.
You'd save $390 in the third bracket, if your income is between $81,452 and $126,264.
You'd save $350 in the second bracket, for income between $40,726 and $81,452. You'd save only $260 in the lowest bracket, for income below $40,726.
At the same time, in a low bracket, an RRSP deduction might even allow you to receive more child tax benefit or let you claim a bigger medical expense tax credit. Considering how income-tested benefits are affected, you could very well be in a higher tax bracket than your taxable income alone would indicate.
STRETCH YOUR CONTRIBUTION
By knowing how much tax you can save with your RRSP contribution you might want to borrow some money, for a very short term, to stretch the size of your contribution further.
For example, suppose you have $1,000 cash to make your RRSP contribution and you are in the 35 per cent tax bracket. We'll assume you have had plenty of tax deducted from your paycheques to convince you that you should have a refund coming. You expect a $350 tax refund.
Why not borrow $350 and raise your contribution to $1,350? You could repay your $350 loan with your refund that can arrive by early April if you file your tax return as soon as possible.
Doing the math (dividing $1,000 by 0.65) you could even borrow up to $538 to increase your contribution to $1,538 knowing your refund would be $538.
Rushing to make a last-minute RRSP contribution is a hit-or-miss approach to retirement planning. You are more likely to succeed in building a sizable nest egg by contributing to your RRSP regularly throughout the year.
With a monthly RRSP deposit plan in action you'd be following the well-known financial adage "pay yourself first." Learn to live without $50 per month. Then increase that whenever you get a raise.
Does your employer offer a group RRSP? If your contributions would be matched by your employer, take advantage of the the opportunity.
With a systematic RRSP deposit plan in place you can arrange to have less tax deducted at source. Use form T1213. Having less tax deducted at source in the first place means that you never again need to wait for your tax refund. In fact, rather than contributing $100 per month, for example, why not increase the amount to $150-per-month if you can have $50 less tax deducted at source?
MONEY AT WORK
After making your RRSP deposit, don't just leave it sitting in a savings account or money market fund. Talk to your financial adviser about your goals and when you will likely begin withdrawals.
If you are within five years of making a withdrawal, you would likely want to emphasize safety of principal. If you are 10 or more years away from making a withdrawal you may want to acquire some investments that grow. Of course, you would have to be able to tolerate occasional downward price fluctuations of your investment.