TAXES, TAXES, TAXES! Its that time of the year again to get your documents together and file tax returns, and the deadline is approaching to make a final RRSP contribution to reduce your 2020 taxes.
Registered retirement savings plans (RRSP) and tax-free savings accounts (TFSA) are tax efficient investment vehicles, and depending on your situation each can have different benefits.
Here are a few quick tips to get you started:
Registered Retirement Savings Plans (RRSP)
- How does an RRSP work?
- Pre-tax money is contributed (contributions result in tax deduction)
- Income and gains accumulate tax free until the money is withdrawn
- Withdrawals are taxed at your marginal tax rate
- Maximize tax savings with a high marginal tax rate today when you contribute and a lower marginal tax rate when you withdraw the funds in the future.
- 2020 Contribution deadline?
- March 1, 2021
- 2020 Contribution limit?
- 18% of your 2019 earned income (up to a maximum $27,230) plus any unused contribution room from previous years
- How long can you contribute?
- Until the end of the calendar year in which you turn 71
Tax-Free Savings Accounts (TFSA)
- How does a TFSA work?
- No deduction for tax purposes – after tax money is contributed
- All income and gains earned in a TFSA account accumulate tax-free
- No tax on withdrawals
- Contribution deadline?
- No deadline, just the available contribution room accumulated over the years
- Contribution limit for 2021?
- $6,000 plus any unused contribution room from previous years
- If you have never contributed to your TFSA, the total cumulative contribution room is now $75,500 (since the TFSA first began in 2009)
Avoid unintended consequences by consulting with a DMCL advisor.