Pacific Spirit strongly encourages clients to contribute early to maximize the benefits of government plans including Registered Retirement Savings Plans, Registered Education Savings Plans, and Tax-Free Savings Accounts.
Registered Retirement Savings Plan (RRSP) Contributions
2014 RRSP Contributions
Registered Retirement Savings Plan (RRSP) contributions must be made by March 2, 2015 to be deductible on your 2014 personal income tax return. The advantages to early contributions are:
- Income earned in your RRSP is tax sheltered. The income earned on the same funds held outside of your RRSP is taxable in your personal hands. You can effectively convert taxable income into tax deferred income by investing early to your RRSP.
- You can lengthen the period that your investment grows on a tax-deferred basis by starting the process sooner, rather than later.
- The sooner the funds are contributed to your RRSP the lower the risk that they will be spent outside the RRSP, and otherwise not available for making the RRSP contribution. It seems that the longer RRSP contributions are left, the harder it is to find the money to make the contribution.
The basic contribution limit for 2014 is the lesser of $24,270 or 18% of your earned income. If you are a member of a pension plan, if you have a pension adjustment reversal, or if you have RRSP contribution room available from prior years the amount that you may contribute may be significantly different from the basic limit. An RRSP may enable you to shift income from a high tax rate year to a future lower tax rate year.
2015 RRSP Contributions
It is not too early to make your 2015 RRSP contribution as well. The advantages to contributing early to your RRSP are so strong that we encourage our clients to make your 2015 contribution now, rather than waiting until early 2016. For the year 2015, the basic contribution limit rises to the lesser of $24,930 or 18% of your earned income. If you are a member of a pension plan, if you have a pension adjustment reversal, or if you have RRSP contribution room available from prior years the amount that you may contribute may be significantly different from the basic limit.
Registered Education Savings Plans (RESPs)
At Pacific Spirit, we encourage our clients with children or grandchildren to consider making RESP contributions to provide for their future education. The Government of Canada’s Education Savings Grant program makes it very attractive to invest in an RESP for a child or grandchild. Not only can you save on a tax-deferred basis for a young person’s post-secondary education, but the RESP can also receive a grant directly from the federal government of up to $500.00 per year.
The grant is based on 20% of the first $2,500 in annual contributions for children up to the age of 18. If maximum grants have not been received in past years, the Canada Education Savings Grant contribution room may be carried forward. The maximum annual Canada Education Savings Grant, though, is $1,000 and this limits your ability to access unused grants in any one year. Grant contributions under the program for children aged 16 and 17 will only be made if there have been minimum contributions in respect of that child in previous years. There are also maximum lifetime contribution limits per beneficiary ($50,000) and lifetime maximum Canada Education Savings Grant amounts per beneficiary ($7,200). RESPs are a very loving way to advance a child in life.
Tax-Free Savings Accounts
Every resident of Canada aged 18 and older may contribute up to $5,500 to a Tax-Free Savings Account (TFSA) in 2014. If you did not contribute to a TFSA in 2009 through 2014, your unused contribution room for these years carries forward to 2014. Although your contributions to a TFSA are not tax deductible, the investment income and capital gains earned on investments in the account will be tax-free. Withdrawals (both from income and from contributions) can be made at any time without tax consequences.
© Pacific Spirit Investment Management Inc., 2015. All rights reserved.