Today is the last day to contribute to a Registered Retirement Savings Plan (RRSP) for the 2020 tax year, but missing the deadline isn’t the end of the world, especially for anyone whose income has taken a hit because of the COVID-19 pandemic.
Canadians can contribute up to $27,830 or 18 per cent of last year’s income until midnight to get the maximum tax refund. Once cash is deposited it can be used to invest in stocks, bonds, mutual funds, ETFs, and other investment vehicles.
This year is wildly different than others with millions out of work, and businesses shuttered.
Kelley Keehn, personal finance educator and author of Talk Money to Me, says it’s not now or never because contribution room carries over.
“Obviously the tax deduction is a juicy incentive. If you don’t have adequate emergency savings or lots of high interest rate credit cards, it’s likely best to hold off on the RRSP,” she told Yahoo Finance Canada.
“Plus, if you’re not 100 per cent sure you can tie up your funds until retirement, unless you’re a first time home buyer or using the money for future learning.”
Who should contribute to an RRSP
The pandemic’s economic effects have been uneven across age and income groups. Young and low-income workers in the service sector have been hit particularly hard, as have non-essential small business owners. But for people fortunate enough to have pivoted to working from home, while maintaining income levels, Keehn says an RRSP still makes a lot of sense.
“If you’re in a higher income tax bracket, have a rainy day fund and no high interest rate debt, it could be great for you. Especially if you take the tax deduction and reinvest it or pay it down on your mortgage,” she said.
Keehn says regardless of the deadline it’s a good time to get into the habit of saving, even if a $25 monthly contribution to an RRSP or TFSA is all you can afford.
A new survey from BMO found that 12 per cent of respondents said they didn’t contribute to an RRSP this year because of the pandemic. BMO found the average amount held in RRSPs nationally is $112,295 which is a 3.3 per cent increase from 2019 ($111,929). The survey also revealed half of respondents didn't know which investments are eligible to be held in an RRSP.
Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.