Uh oh – you waited too long to contribute to your RRSP and now it’s past the March 1st deadline. You’ll have to wait until 2020 to take advantage of the tax reduction for any more contributions this year.
If you’re reading this, you should already understand that investing in your RRSP is generally a good idea. Saving for retirement and getting a nice tax refund is killing two birds with one stone, but you may be hesitant to lock up your money until retirement, especially since you won’t get the tax refund for a whole year.
What should you being doing with your money in between now and next year? Here are 4 things to invest in other than your RRSP.
But first, let’s talk about how RRSP contributions work to reduce your tax.
Many people don’t contribute to RRSPs during the year, and scramble to put money in just before tax season to get a refund. This makes it easy to keep track of your contributions, since you only make one contribution per year right before March 1st.
The date March 1st is important because it’s the deadline for contributions made in that year to be counted towards last year’s taxes. This is important, so I’ll repeat it.
Contributions made before March 1st, 2020 can be used to reduce taxes for 2019.
If the deadline is missed, you have to wait until the next year to get your increased refund. March 1st is not the deadline for contributing to your RRSP in general. You can contribute to your RRSP at any time, so long as you stay within your contribution limits.
Tax-free savings accounts share a few similarities to RRSPs, but the most important is the tax sheltering. Growth within RRSPs and TFSAs are not taxed, so you get to keep 100% of the growth.
Normally, when you make money on investments, you have to pay one of 3 taxes:
These taxes can take a big bite out of your real return depending on your tax bracket.
But when an investment makes money within a TFSA, you don’t have to pay any tax, for any reason. Ever. Unlike an RRSP, you don’t get taxed when you withdraw from your TFSA before retirement. Any withdrawals from a TFSA also don’t count as income, so you don’t have to pay additional income tax. You also won’t lose any income-dependent benefits, like Old Age Security.
Contributing to your TFSA never reduces your income, so you don’t have to worry about the timing of your contributions. If you have available contribution room, it never hurts to add to your TFSA. Just like an RRSP, there will be a yearly contribution cap that gets carried forward if you don’t max it out.
Unlike an RRSP, you actually get contribution room back the next calendar year after a withdrawal. This makes the TFSA an ideal way to save for both short-term and long-term goals. In the short term, you get the benefit of getting contribution room back, and in the long term, you get the benefit of tax-free growth.
If you want to learn more about TFSAs, check out our TFSA mega guide here!
Guaranteed Investment Certificates (GICs) are one of the only investments that are guaranteed to make you money. It may not be a lot of money, as the best GIC interest rate in Canada right now is 3.35% on a 5-year term, but it is 100% guaranteed. Even if the institution that offered the GIC were to fail, you’d still get your money back thanks to Canadian deposit insurance.
There are terms ranging from as little as 30 days to as long as 5 years. Just be aware that for most GICs, you’re locked into whatever term you choose. You can’t easily take your money out of a GIC.
The easiest way to keep your money safe is to place it in a high-interest savings account. As the name implies, it’s a savings account that pays out high-interest. Unlike a GIC, which can’t be withdrawn from before maturity, you can take money out of your HISA whenever you like. If you already missed the RRSP deadline, then getting a 1-year GIC from today won’t help since you’ll also miss it again next year.
As a savings account doesn’t have any restrictions, you can put your money in now and take it out when you need it, whether it’s one day or 355 (the number of days from today, March 11, 2019, til the next RRSP deadline, March 1, 2020).
Just because you missed the deadline for contributions to reduce your taxes for 2018 doesn’t mean contributing to your RRSP is a bad idea.
Any contributions you make now will reduce your taxes for 2019, which you’ll get back as a refund after you do your taxes. Just because you don’t get it soon doesn’t mean you don’t get it.
Plus, investing earlier is almost always better than investing later. Sure, putting money in the market immediately before a downturn can sting, but no one can accurately predict the market. If they could, they’d be rich almost immediately.
By investing early you’re giving your money more time to experience the power of compound interest. As your money grows over time, more of it gets invested, which accelerates its growth. Saving your money until the RRSP deadline can feel good because of the near-immediate refund you get, but investing early will often produce great returns as well.