The start of a new Investing Season
In a few more hours, it will be January, time to face the spending music. But the new year also marks the start of another investing season, for those still solvent enough to take advantage of new contribution opportunities for RRSPs and tax-free savings accounts.
For those who overspent in December, the first order of business is to pay off high-interest credit-card debt or clear balances on overextended lines of credit. No registered investment beats wiping out high-interest debt.
But the sooner you’re clear, the earlier you can get back to the discipline of adding to taxadvantaged investments. The first opportunity is almost here. As of Jan. 1, any Canadian 18 or older can add another $5,000 to TFSAs. That brings the cumulative contribution room since the program commenced (in January 2009) to $20,000, plus any investment growth.
The second big opportunity also comes in the first quarter. This year’s RRSP contribution deadline is Feb. 29, since 2012 is a leap year. Procrastinators take note: Unlike prior years, March 1 will be too late in 2012. Get the money in there by midnight, Feb. 29.
There are significant differences between RRSPs and TFSA contribution rules. TFSAs are straightforward: You get $5,000 contribution room whether or not you earned taxable income the previous year.
2012 is a leap year so RRSP deadline is Feb. 29th this year
RRSPs are trickier. Feb. 29 is the contribution deadline for the 2011 tax year just ending. Tax returns must be filed for calendar 2011 by April 30; making an RRSP contribution in calendar 2011 or the first 60 days of 2012 is an excellent way to reduce tax owing. For those in the top 46% tax bracket, a $10,000 contribution will save you $4,600 in tax payable.
Unlike TFSAs, there’s no one amount all Canadians can contribute to RRSPs. The maximum is 18% of the prior year’s earned income, to a limit of $22,450 (for the 2011 tax year, up from $22,000 in 2010). This is reduced for members of employer-sponsored registered pension plans. How much less is set by the PA or pension adjustment detailed in the T4 slip issued by employers early in 2011.
After you filed your 2010 taxes on or before April 30, 2011, the Canada Revenue Agency should have sent you the precise amount you can contribute to your RRSP in 2011. If you don’t have the information, guestimate it and contribute the same as the previous year.
How to get 14 months ahead of yourself with RRSPs
The other tricky thing about RRSPs and the new investing season is that once Jan. 1 arrives, you can also contribute the full amount for the 2012 tax year about to commence, not just the 2011 tax year now ending. In other words, you can get 14 months ahead of yourself by contributing an amount on Jan. 1, 2012, even though the RRSP deadline for the full year won’t occur until late February of 2013. The maximum RRSP contribution amount for calendar 2012 is $22,970.
Why do this? Anyone who believes in the time value of money and the power of tax-free compounding will tell you that, other things being equal, the sooner money is tax-sheltered and growing, the bigger the ultimate sum will be. It’s good discipline to maximize tax-sheltered savings as soon as you’re allowed to.
Because the new investing season is heavily loaded to the first two months, those conflicted between debt repayment and investing can adopt one of two strategies. Knowing we can dump tens of thousands of dollars into registered plans every January, our family starts accruing for this the previous summer, building up cash in non-registered accounts ready to transfer in January.
For those who find it hard to build up large lump sums in advance, the alternative is to set up pre-authorized chequing arrangements of 12 equal monthly payments into both your RRSP and TFSA. A $416.67 monthly payment maximizes the $5,000 annual allotment to TFSAs, while a whopping $1,914.17 a month is needed to get to the top RRSP limit of $22,970.
IMPORTANT 2012 TAX DEADLINES
Jan.1 First day you can contribute $5,000 to a TFSA for calendar 2012
Feb.29 RRSP deadline for 2011 tax year
April30 Tax filing deadline for 2011 tax year
Jan.1,2013 First day you can contribute $5,000 to a TFSA for calendar 2013
March1,2013 RRSP deadline for 2012 tax year