The deadline has passed but tax expert says the conversation for next year’s contributions should really start now
The RRSP contribution deadline has now passed and that sound you hear is thousands of advisors breathing an audible collective sigh of relief.
It’s likely been the busiest season yet if a recent survey by H&R Block is anything to go by. It reported that 32% of Canadians planned to contribute to their RRSPs, a 6% increase on last year. Manitoba had the highest intent to contribute (40%) compared to Ontario and B.C. (both 31%).
The run-up to yesterday’s deadline is often a dilemma for investors as they seek to balance TFSA savings with retirement contributions and the opportunity to potentially unlock a larger tax return.
However, H&R Block tax expert Micheal Davis believes that RRSP season shouldn’t just be a month-long scramble and should instead be an ongoing conversation that perhaps involves putting a little aside as they go through the year.
He told WP: “Telling people [close to the deadline] it would be very beneficial for you to go make a $5,000 deposit, that can be a stretch for some and lead to some families feeling a little strained. If they're looking at doing that, so they can bring themselves to a balance of zero or even get a small refund, then talk to them about preparing for that. Over the next year from March 3 all the way to next year, maybe put away a little bit as they go through the year.”
Auto deposits are one obvious way for clients to get used to ongoing RRSP savings, while regular payments can also be a good way to utilize your TFSA all-year round. Davis explained: “[A client] could put money in the TFSA and have it gain some good interest. Then, if they need to access that money, it’s always there; there’ll be no taxes. If they do want to access it and want to make that lump sum RRSP payment, they can just transfer it from one to the other.”
Davis added that, for financial planners, ensuring clients get the most from the tax breaks comes down to goal-setting and understanding why they came to you in the first place. For example, if buying a first home is a priority, the RRSP might be the best bet given its before-tax dollar benefits and, crucially, the first-time homebuyers’ option.
On the other hand, if they need quicker access to their money – to maybe buy a car or pay for a vacation – the TFSA is probably the route to go. “But diversifying your portfolio and doing a little bit of both - preparing for your retirement and preparing for that rainy day fund - is likely in most people's best interest,” Davis said.
For people who owe money, a potential refund windfall forms a crucial part of their financial plan. One good example is of self-employed individuals who work off commission and don’t have regular tax deducted off their contributions. Davis added: “A lot of them are comfortable with an amount owing at the end of the year but this is when we really get to bridge that gap, break even or even get a refund status on their return.”
