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Last-Minute RRSP Contribution? Avoid These Common Mistakes

02/22/2016 12:44 EST | Updated 02/22/2017 05:12 EST
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February 29th. Date which repeats on leap year. Calendar (rare days) concept.

The February 29 deadline is the last chance to impact your 2015 tax return.

The first major financial deadline of 2016 is February 29. This is the last day you can make a contribution to your Registered Retirement Savings Plan (RRSP) and claim the contribution on your 2015 tax return. You still have the first 60 days to make contributions but with the leap year, the deadline is midnight at the end of the month.

Deadlines do have tendency to make people rush decisions without considering all their options. And there can be pressure to make a contribution without understanding what you are actually buying. If you are still debating whether or not to contribute to an RRSP, here are some common mistakes to avoid:

Not lowering your tax bill

Do not think that a $1,000 RRSP contribution will result in a $1,000 refund. RRSP contributions reduce your income subject to tax, so the amount of tax savings will depend on your income as well as the province you live in. At this point, an RRSP contribution is really the last tool available to you before you file to lower your tax bill.

Missing Home Buyers Plan repayment

If you borrowed money from your RRSP to buy your first home, the Canada Revenue Agency expects you to start repaying it within two years. For people who have already contributed to an RRSP, the repayment amount will be deducted from that amount. But if you haven't contributed enough to cover your Home Buyers Plan repayment, it will be considered income for the year and you will pay tax on the money.

Missing RRIF repayment

The last federal budget made changes to the Registered Retirement Income Fund (RRIF) rules to help seniors from depleting their savings too quickly when interest rates are low. The budget lowered the minimum withdrawal amount in 2015 and will allow seniors to make a one-time deposit back into their RRIF to repay the amount equal to the difference between the old minimum and the new one.

Not signing up for MyAccount

You can sign up for the CRA's MyAccount service now and get access to your RRSP contribution limit before your sign-in code arrives. The service will also be useful when it comes time to do your taxes.

RRSP loan confusion

You may want to make an RRSP contribution but lack the funds to do it by the deadline. Depending on your financial situation, you may want to arrange an RRSP loan. But remember, you need to do the math. Interest on an RRSP loan is not a tax deduction and you should use your tax refund to repay part of the loan.

Making early RRSP withdrawals

Raiding your RRSP may seem like a good solution until you file your tax return. You will receive a T4-RSP so you can report the income. Though your financial institution will have withheld a percentage for tax purposes, it may not be enough depending on your income for the year.

Not choosing when to claim

You will receive RRSP slips for your contributions but you can opt not to claim them on your 2015 tax return. You do need to report all of your RRSP contributions for the year including the first 60 days of 2016 but you do not have to take the deduction.

With the ability to lower your taxable income, RRSPs will also be tied to your tax return. And the impact on your tax return is certainly one of the factors in deciding to contribute but you should also consider your overall situation.

Going into debt to get a tax refund may not be the best strategy. Or making early withdrawals can cause tax headaches. But there are options that allow you to make an RRSP contribution now and figure out how you want to invest it later. RRSPs can be a good way to save for retirement but do your research and understand where your money is going.

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