How much RRSP contributions should you make?

The 2012 tax year RRSP deadline is March 1, 2013. Many people automatically assume that they should contribute as much as they can afford or max out their contribution room. Both assumptions can be costly mistakes.

If you simply buy as much RRSPs as you can afford, you run the risk of over contributing and could face significant penalties. In addition, withdrawing over contributed RRSPs is a hassle and cumbersome multistep process.

Using up your entire contribution room just because you can isn’t always the best move either. Depending on your future needs, absorbing RRSP or RIF income down the road can actually cost you higher taxes and induce benefit claw backs, such as the Old Age Security claw back. Moreover, you may be better off delaying your RRSP contribution and deductions until a year with higher marginal tax rates.

A professional accountant specializing in taxation is your best bet for determining your optimum RRSP contribution for a particular tax year. They should consider your current and future income projections and formulate a tax strategy that maximizes your RRSP contributions. A small amount of tax planning can avoid benefit claw backs and make the difference between receiving a 20.06% refund on your contribution vs. a 43.7% refund. The difference between the two applicable marginal tax rates can result in up to a 118% better return on your contribution. The added benefits and peace of mind should be well worth the cost of hiring a professional accountant.