02/26/2016 11:11 EST | Updated 02/26/2017 05:12 EST

Time Is Running Out To Make Your RRSP Contribution

Notebook with RRSP  sign on a table. Business concept.
designer491 via Getty Images
Notebook with RRSP sign on a table. Business concept.

An RRSP Saves you Money at Tax Time, But Many Canadians still don't contribute

When most working Canadians hear "RRSP," they think of their retirement savings. Or maybe even a nice winter home on the shores of sunny Florida. However, a Registered Retirement Savings Plan (RRSP) is more than just a retirement savings plan. It also has an impact on your tax obligation and can save you hard earned dollars come tax time.

But not every Canadian may see it this way. A survey by H&R Block found that only 18 per cent of Canadians have contributed, or are planning to contribute, to an RRSP as part of their tax filing plans this tax season. This compares to 23 per cent of Canadians who say they plan to contribute, or have contributed to, a Tax-Free Savings Plan (TFSA).

Perhaps the reason why more people don't plan to take advantage of a RRSPs tax benefits is because only half of Canadians said they understand the different ways TFSAs and RRSPs impact their tax returns.

With the February 29th RRSP contribution deadline looming, here are the key differences you need to know about RRSPs and TFSAs:

1. RRSP contributions are a tax deduction. TFSA contributions are not. The money you contribute to an RRSP throughout the year is then deducted from your taxable income come tax time. This reduces the amount of taxes you must pay. When you contribute money to a TFSA, you do not get a tax deduction so it doesn't lower the amount of taxes you must pay (but any interest you earn is tax free).

2. Contribution limits for RRSPs are based on your earned income. TFSA limits are the same for everyone. Earned income includes employment earnings, self-employment earnings, taxable scholarships, rental income and a few other things. To take full advantage of RRSPs, people should file a tax return every year that they have earned income so that their RRSP contribution limit is as high as possible.

3. You are not taxed on TFSA withdrawals, but you are on RRSP withdrawals (with some exceptions). The only times you can make tax-free withdrawals from your RRSP are when making first time property purchases through the Home Buyers' Plan or paying for education through the Life-Long Learning Plan. You are not taxed on TFSA withdrawals and any amount you do withdraw is added back into your contribution limit for the following year.

4. Whether you take advantage of RRSPs, TFSAs, or both, depends on your unique financial situation. The benefit of TFSAs is that the money is easy to access in the short term. While there are penalties for accessing your RRSP money early, your RRSP contributions decrease the amount of taxes you owe each year. These are things to take into account when deciding how to save.

Is your income on the way up? Are you at the top of your game and expect to be earning less over the next few years? Both RRSPs and TFSAs are valuable ways to save for the future. But, it's important to understand the difference and how each affects your tax obligations to determine the best way to save for your future.

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