Do you want to make extra Registered Retirement Savings Plan (RRSP) contributions for the 2024 fiscal year?
If so, the clock is ticking.
Last year’s RRSP contribution deadline is March 3 of this year.
Every year, the Canada Revenue Agency (CRA) gives Canadians a few extra months into the start of a new year to make RRSP contributions for the prior year. The reasons for this include the fact that peoples’ December paycheques sometimes take a month or more to clear and the fact that Canada’s fiscal years differ from the calendar year.
Making an RRSP contribution is one of the best financial decisions you can make. RRSP contributions give you a tax break; they let you compound investments tax-free, and they can increase the size of your tax refund. So, if you want to get in some last-minute RRSP contributions for 2024, now is the time to do it.
Reasons for making RRSP contributions
There are many good reasons to make RRSP contributions. I outlined a few in the introductory paragraphs, and in the bullet points below, I elaborate on them.
- RRSP contributions give you a tax break. The money you contribute to an RRSP is equivalent to a business expense. This means that you are not taxed on the amount you contribute (up to a maximum of about $18,000 in a year). So, if you make a $10,000 contribution and your marginal tax rate is 33%, you save $3,300. Sweet!
- The RRSP allows you to grow and compound your investments tax-free. Normally, the “growth” in an investment you own is interrupted by taxation events: selling stock and receiving dividends. In a taxable account, therefore, your actual return on a stock is less than what a total return chart for that stock shows. This is not so with an RRSP. The RRSP leaves your investment tax-free up until you turn 71 (or whenever you decide to withdraw). So, holding assets in an RRSP can boost your after-tax returns.
- RRSP contributions can increase your tax refund. Somewhat a corollary of the first bullet point, RRSP contributions can increase your tax refund. Most Canadians get a tax refund (return of taxes not owed at the end of the year). This is because employers usually highball it rather than lowball it when estimating taxes owed. If you make an RRSP contribution in any given year, then you can get a bigger refund the next year. This actually is not the best thing to do. Because Canada experiences inflation rather than deflation most of the time, it’s better to collect your tax savings as soon as possible, by telling your/your employer’s accountant to remit less taxes immediately. But if you’re one of those who enjoys the psychological thrill of getting a big refund, making an RRSP contribution can help you attain one.
What to hold in your RRSP
Once you’ve made your RRSP contributions, you need to decide what to hold in your RRSP.
A great idea is an index fund like iShares S&P/TSX 60 Index Fund (TSX:XIU). This ETF is built on a portfolio of the 60 largest publicly traded companies in Canada. It holds 60 stocks, which is a good amount of diversification. It has a low 0.12% management expense ratio, so you don’t pay too much to the managers. And finally, it has a narrow bid-ask spread, which reduces the amount of money you pay to market makers. XIU has a lot of things going for it. And it’s tax-free if held in an RRSP.
