A new report from the National Institute on Ageing finds only one-third of working Canadians 50 years and older can afford to retire when they hope to.
For the remaining two-thirds, it’s a game of catch-up. Investing for retirement later in life shortens the time for investments to compound, but there is at least one advantage for older Canadians in their peak earning years.
It starts with making a registered retirement savings plan (RRSP) contribution before the Feb. 29 deadline. You can always contribute to your RRSP, but this month’s deadline applies to plan holders who want to deduct the contribution from their 2023 income – and time is of the essence.
Contributing before the deadline presents an opportunity to super-charge your contributions, and to boost the amount invested by re-contributing the tax refund.
Here’s how.
Income tax for most working Canadians is deducted from their regular paycheques throughout the year by their employers on behalf of the Canada Revenue Agency (CRA). The amount is a general accounting formula based on the marginal tax rate for their specific income level. The higher the income, the bigger the marginal tax rate.
That formula does not take RRSP contributions or other income tax deductions into account, which often lowers the marginal tax rate and the total amount owing to the CRA. That’s where the refund normally comes from.
As a very simplified example, the combined federal-provincial marginal tax rate could exceed 50 per cent for Canadians in the highest income bracket, 40 per cent for those with six-figure incomes, and lower than 15 per cent for Canadians in the lowest income bracket below $50,000. Rates vary from province to province.
That means $10,000 contributed to an RRSP by someone with an income in the $100,000s would reap a tax savings of about $4,000, compared with roughly $1,500 for someone in the lowest tax bracket.
Re-contributing that extra $4,000 would not only add to the investments already compounding, but would also generate another 40-per-cent tax refund and another 40-per-cent refund based on that amount (and so on).
One idea to harness the compounded tax savings before the Feb. 29 RRSP deadline is to calculate the total refund, borrow the amount above your original contribution from a line of credit and pay it back when you receive the refund in the spring.
The are many online RRSP refund calculators that can help. As an example, the total compounded refund on a $10,000 contribution at a tax rate of 40 per cent is $6,650. That means your 2023 contribution can be stretched to $16,650.
There are limits to how much you can contribute to your RRSP but unused amounts can be carried forward each year.