—Updated March 21, 2014—
By now many Canadians have received their government issued tax refund cheques in the mail, the eager beavers have anyway. The rest have until April 30 to file their 2013 income tax return without fear of penalty.
The prospect of getting money back is just too good for this eager beaver so I file early every year. I case you’re wondering, I won’t be blowing my tax refund on a shopping spree. As MoneySense Senior Editor David Hodges illustrated in a recent issue, reinvesting the money back into your RRSP is definitely the way to go—the numbers speak for themselves.
That brings me to the reason for this blog post; one BIG reason. It jumped out at me as I tore the perforated edge on my crisp new cheque: “Your unused RRSP contribution room is….” Whoa!—I thought—that’s a big number. I guess I was so surprised because I’m a consistent saver. My RRSP contributions automatically come off every paycheque before I get a chance to spend the money. I’ve been saving this way since I entered the full-time workforce a few years ago.
But in retrospect, I shouldn’t have surprised at all. Here’s why: I’ve been filing income tax returns since I earned my first paycheque as a teenage snack bar attendant at a local hockey arena. That means I’ve been gaining RRSP contribution room every year since I served the first of countless hot chocolates to cold and weary hockey moms more than a decade ago.
Initially I was tempted to ignore the 5-figure number. After all, I’m not alone. Canadians have more than $600 billion in combined unused RRSP contribution room. These apathetic thoughts disappeared however as soon as I realized I just received a gift from my 16-year-old self.
You see, I’m lucky enough to work for an employer that provides a defined-benefit pension plan. For 2013, Canadians can claim the lower of 18% of their earned income or $23,820 as their RRSP deduction unless they are a member of parliament or have a DB pension plan. This second group can only claim that amount less what has been socked away in their other registered plan that year. This is called a pension adjustment (PA) and the amount is reported your T4 slip (Box 52, line 206). My best guess is that this rule exists to level the playing field for all Canadians saving for retirement. And while I’m not complaining by any means, the PA does reduce my personal RRSP annual contribution allowance by a substantial amount. So back to that gift…now that I’m a little older, a little wiser and earning a full-time salary I can tap that unused room and for the time being pay less tax. Sure, I’ll be taxed on my savings eventually, but if time my withdrawals properly (when my income is low) it shouldn’t sting too much.
So thank you 16-year-old me for the huge RRSP potential! Of course in order to realize this potential, adult me has to up my savings game. It will be impossible to catch up to my unused RRSP room in one year, especially this year of all years. (I’m getting married and the money coming in seems destined for everywhere and everything except my savings.) Instead, I’ll have to put a dent in the RRSP bucket over time by gradually increasing my personal savings rate. First thing’s first: Reinvest the tax refund cheque back into the RRSP. It’s a head start if I’ve ever seen one. And I’m on my way…