It’s everyone’s favourite time of year – Tax Time! This is the time of year where you get to enjoy putting together your documents and filing tax returns! Or if you are a client of Richardson Miller LLP, we do the heavy filling for you. For those who contribute to their RRSPs, the deadline is approaching to make a final RRSP contribution to reduce your 2020 taxes.
RRSP contributions vs TFSA contributions
Registered retirement savings plans (RRSP) and tax-free savings accounts (TFSA) are tax-efficient investment vehicles, and depending on your situation each can have their respective benefits.
How does an RRSP (Registered Retirement Savings Plans) 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- Income and gains accumulate tax-free until the money is withdrawn.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.
NOTE – If you make an early RRSP withdrawal: You pay a withholding tax: The withholding tax varies depending on the amount withdrawn and your province of residence. You pay income tax on early withdrawals. Make sure that they are reported on your tax return as income.
RRSP Deadline Tips:
What is the 2020 contribution deadline?
- March 1, 2021
What is the 2020 contribution limit?
- 18% of your 2019 earned income (up to a maximum $27,230). You are also able to contribute any unused contribution room from previous years.
How long can you contribute?
- You have until the end of the calendar year in which you turn 71.
How does a TFSA (Tax-Free Savings Accounts) work?
- No deduction for tax purposes – after-tax money is contributed.
- All income and gains earned in a TFSA account accumulate tax-free.
- There is no taxation on withdrawals.
Does the TFSA have a contribution deadline?
Unlike the RRSPs annual deadline for tax purposes, the TFSA doesn’t have one. You can contribute throughout the year based on the contribution room that you have accumulated over the years.
What is the contribution limit for 2021?
The limit for 2021 is $6,000. You are also able to contribute any unused contribution room from previous years.
Never contributed to your TFSA? As of this year, the total cumulative contribution room is now $75,500 (since the TFSA first began in 2009)!
Your annual tax return doesn’t need to be overwhelming. Richardson Miller LLP is here to help you determine whether an RRSP or TFSA is more beneficial and ensure that your taxes and accounting needs are met. Contact us today!
Angela Richardson is a Chartered Professional Accountant (CPA, CGA) with more than 17 years experience working in public practice with small to medium sized businesses. While financial statements and tax returns are part of the occupation, consulting and assisting clients to achieve their entrepreneurial dreams is her true passion.