On one hand I find it confounding that many people only consider saving for their retirement once a year – and rush to contribute to their RRSP before the annual deadline. On the other hand, at least there is a deadline that forces them to contemplate their financial future at least once a year. The cutoff to make a contribution to reduce 2017 taxes is March 1st. For those sitting on the fence about whether to contribute or not, here are some compelling reasons why you should at least consider doing such.

• You get a tax deduction. This tax deduction is more valuable to those with higher incomes and the specific amount of tax you save will depend on your marginal tax rate.

• Once inside the tax-sheltered environment, investments grow faster than they would outside an RRSP where there would be annual tax on income from the investments, and upon sale, tax on capital gains. Your investment income stays tax-sheltered while your money remains within your RRSP, and later after you convert it to a Registered Retirement Income Fund (RRIF) – which everyone is required to do upon attaining age 71. All taxes remain deferred and only withdrawals are subject to tax.

• Deferred tax is really a zero-interest loan from the government and you won't repay the loan until much later in retirement.

• Another attractive feature of RRSPs is that you can invest the tax deduction you received and grow wealth from this stream as well, albeit this stream would be taxable.

• When you do start withdrawing money from your RRSP/RRIF you will most likely be in a lower tax bracket. For example if you are currently in a 40% tax bracket you would get back $400 for a $1000 contribution. While in retirement with potentially lower income, if you were in a 30% tax bracket, you would only pay $300 in tax when you withdraw the funds. A savings of $100 in tax.

• If you are ever tempted to dip into your RRSP savings before you retire (other than for a Home Buyers Plan or Lifelong Learning Plan) you would have to pay tax on your withdrawals. This disincentive to withdrawing the money early makes it more likely that the funds stay in the plan and remain for their intended use – retirement income.

• However in the right circumstances, you can use your RRSP to help buy your first home. The Home Buyers Plan (HBP) allows you to withdraw up to $25,000 from your RRSP to use for the down-payment on a qualifying home without paying tax on the withdrawal. However, be mindful that there are rules, so check with the Canada Revenue Agency or your financial adviser to ensure you follow the guidelines.

• The Lifelong Learning Plan (LLP) allows you to withdrawal up to $20,000 from your RRSP to finance training or education for you or your spouse. (not your children). Again, there are rules, so be sure to get advice before diving in.

• You can claim your deduction when you need it most as the tax deduction for your RRSP contribution can be carried forward indefinitely. Most people claim their RRSP deduction the same year they make their contribution, but that may not always be the most tax efficient way to do it. If your taxable income is very low, you may want to consider deferring your deduction to a year in which your income (and corresponding tax rate) are higher – in order to maximize your overall tax savings

• RRSP income is important even if you have a pension. Very few employer sponsored pension plans are designed to provide all of the retirement income you will need (or want), so saving on your own through an RRSP can be extremely beneficial. For example, let’s assume your pension plan at work provides 40 per cent of your needed retirement income. Then add government programs such as the Canada Pension Plan and Old Age Security... but there still could be a gap between what you desire in retirement and what you will receive. That is where saving through your RRSP can be so important and can help you to live the lifestyle you want in your golden years.
• Canadians are living longer than ever before. You will likely need all the RRSP savings you can accumulate to cover the costs of a retirement that may last 25 years or longer. Not only are we are living longer, we also want to retire at younger ages. One of the issues facing early retirees is that some of the other retirement income streams only kick in well after they retire. Early withdrawals from your Canada Pension Plan (CPP) can only happen at age 60 and Old Age Security (OAS) does not start to roll in until age 65 (and will increase to age 67 in the future). The RRSP is the perfect way to finance the gap before those other sources of cash flow become available.

There is still time to make a contribution to reduce your 2017 taxes. Be sure to have a discussion with your financial advisor as to whether a contribution to your RRSP makes sense for you.

-Scott Lewis, Vice President

This writing is for general information purposes only and is not intended to provide legal, accounting, tax or personalized financial advice. Any opinions expressed are those of the author and may not necessarily reflect those of Louisbourg Investments.