Most of us contribute into an RRSP out of habit with the express goal of saving on our taxes by lowering our taxable income with the deduction.
Did you know that an RRSP can also help you plan for retirement by having your investments grow tax free within the plan until the time to start making withdrawals. Many investors will also take advantage of their RRSP in order to buy their first home (Home Buyers Plan) while some of us will use our RRSP to finance a return to school. Regardless of the goal the first step is making that contribution.
Before discussing the different ways one can contribute into their RRSP let’s talk about how much you can contribute each year to your own RRSP. Your contribution room for the year is 18% of your earned income for the previous year to a maximum contribution amount of $27,830 for the 2021 tax year.
You can find your RRSP deduction limit which will also include your unused contribution room from previous years on your most recent Notice of Assessment from the Canada Revenue Agency (CRA).
Now once you’ve determined the dollar amount you wish to contribute, the next step is to proceed with making the contribution into your RRSP. You have three options to contribute funds into your RRSP: Lump sum cash contribution, pre-authorized contribution plan (PAC) and in-kind contribution. Let’s explore the choices.
Most clients prevail themselves of this method. It involves taking an amount in cash from their non-registered account or bank account and contributing the amount into their RRSP in one payment.
How can I do it?
Not everyone can make a large lump sum contribution into their RRSP. A PAC plan is an easy way to save. You can schedule automatic deposits into your RRSP account on a regular basis that works best for you. With your instructions we can arrange to debit an amount from your bank account and contribute into the cash holdings of your RRSP.
Set up your PAC by calling us or sending us instructions via our secure messaging centre and automatically contribute to your RRSP account on a weekly, bi-weekly, monthly or even quarterly basis for as little as $25.00.
Can I buy stocks or ETFs with a 25$ weekly PAC?
With the elimination of commissions at NBDB, investors no longer need to wait until they have a decent amount to invest. They can make smaller purchases of stocks or ETFs (minimum of one share or unit) without a commission, thus lowering the invested amount.
Did you know that cash RRSP contributions are not the only type of contribution you can make? If you are short on cash but have investments held in a non-registered or TFSA account, you can contribute those investment to an RRSP and take advantage of the deduction. The transfer can be done in-kind (stocks, ETFs, mutual funds, bonds) with the condition that the securities are RRSP eligible.
Note that if the security contributed to your RRSP is coming from a non-registered account it will be contributed at the fair market value. Even though you are not selling the security, the CRA considers that it’s a deemed disposition (it’s been sold) and if the market value is higher than the average cost base than any gain is subject to capital gains tax.
In the opposite scenario, if you contributed a security whose value is less than the average cost base, you forfeit being able to declare the capital loss. In that scenario, selling the security to create the capital loss and then contributing the cash proceeds might be a better option. Just remember that you need a 30-day period to elapse before repurchasing the same security or else you won’t be able to claim the capital loss.
Regardless of the contribution option you decide on, you have until the 1st of March, 2022, to contribute to your RRSP and lower your taxable income for the year 2021.
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