This article was reviewed by Chris Singer, CFP®.
Do you look forward to getting a tax refund based on RRSP contributions made during the year? Most people simply spend their tax refund on “fun” things like a vacation or shopping each year instead of maximizing its full potential. If this sounds like you, you’re missing out on some valuable savings opportunities!
You likely already know that making RRSP contributions is a great way to both save for the future and reduce your annual tax bill, but here’s how to really maximize your RRSP contributions:
Increase your rate of return immediately
Use your annual tax refund to pay down higher interest rate debt, and you’ve just achieved a fabulous rate of return. Here’s another way to think about it – if the interest rate on your debt is 19%, just by paying it off early you’ve freed up that extra cash that would have gone towards interest payments, but can now be deployed elsewhere to MAKE you money instead of costing you.
Make it a Double Whammy
If you use your income tax refund to make an additional RRSP contribution (assuming you have enough contribution room for the year), you’ve just saved yourself some more tax payable!
Take advantage of the TFSA
If you don’t have any remaining RRSP room, or it wouldn’t make sense for you to contribute more to your RRSP since you already contribute to a pension plan through work, then put your income tax refund into a TFSA account so the funds can both grow and be withdrawn entirely tax-free. Ask me which is the best scenario for your personal situation at our next review meeting.
Additional Readings: Demystifying The TFSA
Increase your monthly Canada Child Benefit
An often overlooked aspect of RRSP contributions is that they reduce taxable income. For families with young children, using RRSP contributions to bring down total family income may entitle you to a larger Canada Child Benefit (CCB) each month. Your net income is used to determine your eligibility and thresholds for government benefits such as the CCB, the GST credit, etc., so this is a great way to both reduce net income and receive more tax-free government benefits.
Minimize OAS clawback
Currently, the OAS income threshold is $77,580 (in 2019). This means if your income is more than that amount, your OAS benefits will be reduced. Making a RRSP contribution could reduce your taxable income, and bring you below the OAS clawback threshold to ensure you don’t lose any OAS entitlement. For example, say you receive a one-time retirement bonus from your employer the year you retire at age 65. This will raise your total income for the current year and may reduce your eligibility to receive the full OAS benefit the following year.
Maximize income splitting opportunities BEFORE retirement
Is one spouse the primary wage earner, or has a much larger amount saved in his/her RRSP than the other partner? It’s often better for the higher wage earner in the household to make contributions to the lower income spouse’s RRSP (called a spousal RRSP) in order to more evenly distribute income when withdrawing from your RRSP’s or RRIF’s during retirement.