There’s an important tax deadline coming up. And I’m not talking about April 30. While most Canadians are aware that they have to have their taxes filed and sent to the CRA by the end of April, there are several other “tax deadlines” you need to be aware of. Some of them are not as well publicized as others. In this article, I’ll reveal one tax deadline that’s eminently important for retirement savers.
March 1, 2021
March 1, 2021, is the last day on which you can make RRSP contributions for 2020. While this isn’t strictly a tax-filing deadline, it’s a deadline that has bearing on your taxes. RRSP contributions lower your income tax payable to the CRA. The more you contribute, the less you pay in taxes — as long as you stay within your contribution limit. If you have a 30% marginal tax rate and contribute $10,000 to an RRSP, you save $3,000. But only if you get the money in before the deadline. If you don’t, then the savings get rolled over to the next year.
Why it’s so important
The RRSP contribution deadline is very important. The exact reason why depends on your employment situation.
If you have a conventional nine-to-five job, your RRSP contributions determine the size of your tax refund. When you’re employed, your employer usually pays your taxes for you. Any excesses are paid out at the end of the year as a refund. RRSP contributions can generate larger-than-expected refunds. But only if you make the deposit in time.
If you’re self-employed, you may need the RRSP contribution to avoid owing taxes. If you’re self-employed and paying your taxes to the CRA based on the assumption of $X in RRSP contributions, you have to actually pay that $X by the deadline. Otherwise, you’ll be behind on your taxes and will likely get a request to pay back taxes rather than a tax refund.
How to make the most of your RRSP
As we’ve seen so far, making RRSP contributions is very important for retirement savers. It helps you lower the taxes you pay to the CRA, which gives you more saving power. But only if you get the money in by the deadline. If you miss it, your tax savings will be deferred to the next year, which may not be what you wanted.
But contributing to an RRSP is only half the battle. Once you’ve made the contribution, you need to decide what to invest it in. Ultimately, this is a personal decision you should speak with a financial advisor about. But I have two initial suggestions you could research further.
Dividend stocks like Fortis (TSX:FTS)(NYSE:FTS) can be good RRSP picks, because they offer steady dividend income. When saving for retirement, an income stream is a good thing to have, because you don’t want to leave your retirement money entirely up to the vagaries of the market. Dividend income comes from the company itself, not from stock market participants. Therefore you don’t need to be in a raging bull market to earn dividend income. Utilities like Fortis tend to have extremely reliable dividends that are typically paid out even amid recessions and bear markets. Therefore, they can be good for retirees.
An even safer bet is an index fund like iShares S&P/TSX Capped Composite Index Fund. Like Fortis, these funds pay reliable dividends, and are fairly low risk. However, the risk with these funds is even lower than with a utility stock like Fortis, because of the built-in diversification. The more stocks you hold, the lower your total risk. This makes ETFs like XIC the closest you can get to true “buy-and-forget” plays. With low risk and steady dividend income, they belong in every retirees’ portfolio.
