Late contributor

Staring down another the RRSP deadline and not sure what to do? Bruce Sellery’s last minute tips can help the even most dogged procrastinator.

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Question

I know. I shouldn’t have left my RRSP contribution this late. But I did. Any last minute tips?

Answer

It seems Canada is filled with people like you: Thrill seekers who like to cut their deadlines close, or chronic procrastinators who never met a deadline they didn’t resist. I myself was good this year, but in the past have been known to curse the gods while waiting in line at the bank.

Oh well. The deadline for the 2011 tax year is Wednesday, February 29th 2012 at midnight. Here are a few simple steps to help you get your caboose moving and get you back on track before the cut-off date.

Determine how much to contribute

Pull out the Notice of Assessment the Canada Revenue Agency mailed to you after you filed your income taxes last year. It will tell you what your maximum contribution is. If you can’t find it, you can give them a call, social insurance number in hand. Just be sure to have your Sudoku at hand for the inevitable wait.

That said if you’re like most Canadians, you don’t really need to know your maximum contribution because you haven’t always maxed out your RRSP so you are at little risk of exceeding it. If that describes you, you’ll have more RRSP contribution room than you’ll be able to use this year, so the “how much” question will be determined by how much you can afford instead of how much you are allowed.

My advice on that front: Contribute as much as you can afford. The larger the RRSP contribution, the more tax you’ll be able to defer and therefore the bigger refund you’ll get, not to mention the more money you’ll have working to fund your retirement.

Find the money

Most people don’t have a few grand available for a last minute RRSP contribution. But you might have money in a tax-free savings account that you could use, or you might consider getting a loan. There are three basic types of loans: the “gross up”, the “top up” and the “catch up”. For more information on these loan types, check out this great MoneySense article to see if any of them work for you.

Another option is to borrow from an existing line of credit. The advantage to this approach is that it is super simple and you can pay the money back at your convenience. The con is also that you can pay the money back at your convenience. I kind of like the forced repayment plan that comes with an RRSP loan.

Make the transfer

You can run into your local financial institution and endure the lines. Or, if your accounts are linked online, you can do a super simple transfer.

It is important to remember that the deadline everyone is so breathless about is the contribution deadline. You just have to get the money into your RRSP account; you can choose what you invest that money in at a later date. Swing by the branch or go online again in a few weeks and figure that out. Right now, the focus is on getting the money in to your RRSP for tax deferral this tax year.

Avoid the last minute panic next year

There are two simple things that can make your life a lot easier when it comes to RRSPs:

  1. Set up an automatic withdrawal: Ask the nice bank rep to set up a preauthorized contribution that deducts money from your bank account every month on payday and transfers it to your RRSP. You’ll still need to determine where you want to invest the money, but at least you won’t be in a panic about not having the money available to make the most of the tax deferral.
  2. Contribute your tax refund to your RRSP: Many people treat their tax refund as found money. It isn’t a miraculous windfall, of course. It is your money; you just lent it to the government tax-free and now they’re giving it back to you. Instead of blowing it on Cuba, cars or cosmetics, consider transferring your refund into your RRSP right away. Yeah. I’m the life of the party, aren’t I?

In case you haven’t noticed, I’m a passionate believer in RRSPs for most people. So go on, get on with it.

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Please send your money questions to Bruce Sellery at ask@moneysense.ca.

2 comments on “Late contributor

  1. Yup, gotta turn around and put that tax refund back into your rsp. That one finally sunk in for me when I read about it this way (I'll be para-phrasing here big time but hopefully it makes sense). When I put my $ into my RSP it's with after-tax dollars because I don't have any tax adjustment made by my employer. So if I take my refund and use it to upgrade to a big screen TV (or go on holiday, or buy whatever), then my RSP contribution is still made with after tax dollars. This negates one of the whole points of an RSP! I may as well have put the money into a TFSA instead (assuming I have room in that). Either way, the purchase of the new TV should in no way rely on my long term/retirement savings plan.

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  2. Very true. Sometimes we need to hear the same message explained in a number of different ways. My daughter is like that with carrots. Raw? No. Steamed? No. With hummus? No. But raw on a fork, and sold as a "carrot sucker"….Yes!

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