If you have a registered retirement savings plan, or RRSP, you probably know that you have the first 60 days of each year to top up your contribution for the previous year.
But did you know that this rule could help you pay less tax?
Here’s an example.
Let’s say that in 2021, your income was high. That would have a positive impact on your RRSP contribution limit for 2022, since this limit is based on your income for the previous year. Now let’s say that in 2022, your income was a lot lower than in 2021.
Here’s where the “first 60 days” rule comes in.
Contributions made during this period can actually be deducted from your income EITHER for the previous year OR for the current year. If you expect your income in 2023 to be much higher than in 2022, your marginal tax rate might also be higher. In that case, you could take advantage of a bigger tax saving by applying your contributions from the first 60 days to the 2023 tax year.
In the reverse situation, if your tax rate for 2022 was higher than the rate you expect to pay in 2023, you could do the opposite: apply your contribution to the previous year.
Note that if you want to apply a “first 60 days” contribution to the previous year, you need to have sufficient unused contribution room for that year.
That’s why it’s recommended to start each year with a review of your tax situation and a chat with your advisor so you can make the right decision for your situation.
The following sources were used to prepare this video:
Government of Canada, “RRSPs and Other Registered Plans for Retirement.”
Get Smarter About Money, “Making RRSP contributions.”