At this time of year, there are advertisements from every financial institution reminding you that the RRSP deadline is March 2nd, 2015. Normally it would be March 1st, but that day falls on a weekend this year, so the deadline is extended to the next weekday. If you haven't already, we encourage you to read our article on RRSPs, and to decide whether a TFSA or an RRSP is right for you. How do you decide how much to contribute? Read on for details...
Contribution Room Explained
Your RRSP contribution room is calculated based on 18% of your previous year's income (to a maximum of $24,270 for 2014) plus any unused contributions from previous years. Because the 2014 room is based on your 2013 (and prior) income, the amount can be calculated in advance and should be on your 2013 Notice of Assessment. The government gives you $2000 of leeway in contributing to your RRSP, so you can over-contribute exactly $2000.00 and not pay any penalties. However, overcontributions beyond this amount are heavily taxed (1% per month) and are generally not worth it.
How Much to Contribute
You can contribute anywhere between $0 and your limit plus $2000, so what is the best amount?
If your income this year was lower than in previous or what you anticipate in future years (for example, you are between jobs), it might make sense to contribute nothing. The marginal tax rate you pay this year may be lower than in future years, so you would get a much lower refund. Instead, you can park the money in your TFSA for a year, and contribute next year.
If, however, you received a larger-than-normal bonus this year, you may want to contribute the maximum. The reason is that the RRSP refund is based on your marginal tax rate, so it's better, for example, to get a 39% rate on a refund this year than a 32% rate on a refund next year. In this case, it may be worth getting an RRSP loan to ensure you can contribute enough to drop yourself to a lower tax bracket.
If you have any questions about what is the optimal amount to contribute, feel free to contact CJ Capital.