One of the most common mistakes Canadian taxpayers make when putting money into their RRSP is contributing after the deadline.
You can’t claim late contributions until the next tax year so missing the deadline can have a big impact on your tax return — or potentially leave you with a bill from the Canada Revenue Agency (CRA).
Let’s look at how the RRSP contribution deadline is determined and what the date is for the 2020 tax year.
How RRSP Deadlines Are Determined
The RRSP deadline is always 60 days after the end of the tax year you’re contributing for. So you essentially have two months into the new year to contribute for the previous year.
In a normal year, the deadline falls on March 1 since that’s the 60th day of the year. In a leap year, like 2020 was, February 29th is the usual deadline.
If the date falls on a weekend, it gets extended to the next business day, which would be the following Monday. This is also what happened in 2020, for 2019 contributions. February 29th fell on a Saturday so the contribution deadline got bumped to Monday, March 2.
The RRSP Contribution Deadline for Your 2020 Taxes
In 2021, March 1 is the 60th day of the year and it falls on a Monday. So this year, the contribution deadline is the 60th day of the year - March 1, 2021.
You can contribute to your RRSP up until the 60th day so if you leave it until the last day, you’ll still be able to use the deduction on your 2020 taxes. But if you miss the deadline and contribute after March 1, you’ll have to wait until you file your 2021 taxes to claim the credit.
Should You Wait Until the Deadline to Contribute?
With this year’s deadline falling on a Monday, many banks and credit unions will be unusually busy since they may have reduced hours over the weekend. And with the various restrictions in place due to COVID, it’s probably not the wisest decision to put off contributing until the last day unless you absolutely have to.
The sooner you can make your contribution, the better for another reason as well — your RRSP will start growing faster.
One of the main reasons an RRSP is such a good investment is that any interest earned or other increase in value isn’t taxed until you withdraw it. Contributing earlier in the year means you’ll have weeks’ or months’ more growth.
Consider Making Automatic Contributions Well Before the RRSP Date
Rather than wait until the deadline to contribute, think about setting up a contribution that comes out of your bank account automatically. You can set this up to contribute weekly, bi-weekly, monthly, or on any other schedule you want.
If you set up an automatic contribution to line up with the days you get paid, you’ll get the benefit of having your money invested longer without having to come up with a lump sum earlier in the year.
You can still claim the RRSP deduction for all your contributions through the first 60 days of the following calendar year so you won’t lose those extra two months.
Has the COVID Pandemic Affected the 2020 Deadline?
COVID affected almost every part of Canadians’ lives throughout much of 2020. One of the things it affected was the tax filing deadline.
The CRA extended the deadline from April 30 to August 31 in 2020. But that only applied to filing and paying your taxes — not RRSP contributions.
The CRA hasn’t made any indication the deadline for RRSP contributions is going to be any later in 2021. Don’t put it off, hoping the date gets extended. Even if the tax filing deadline ends up being later again this year, there’s no guarantee the RRSP deadline will change along with it.
Contributing to Your RRSP Before You Know Your Final 2020 Income
One of the challenges of contributing to your RRSP earlier in the year is that you may not know exactly what your total income is going to be. If you optimize your RRSP contributions to get the maximum benefit from the deduction, this can be tricky.
One of the benefits of contributing within the first 60 days of the calendar year is that you can claim those contributions on either the previous year’s taxes or that year’s.
For example, if you contribute to your RRSP on January 31, 2021, you could claim the deduction on your 2020 tax return, your 2021 tax return, or a combination of the two.
Having this flexibility means you can contribute even if you don’t know what your final income will be. Employers have until the last day of February to issue your T4 slip so waiting until then is cutting it tight with the RRSP deadline.
If you contribute more than you need to maximize your claim for 2020, you can use the rest in 2021. Just top up your contribution again for that year to make sure you get the most benefit possible.
Be Sure Not To Over-Contribute
Over-contributing is different than contributing more than you need to maximize your deduction. When you receive your notice of assessment from the CRA after you file your taxes, it shows your contribution limit for the following year.
Make sure you keep that number in mind. You can end up paying hefty penalties if you contribute more than your limit.
You can also get this information through the CRA’s online My Account service if you don’t have a copy of last year’s notice of assessment.
Withdrawing from Your RRSP
If you decide to withdraw funds from your RRSP, whether because you’ve reached retirement or because you need to use the money for something, you’ll have to pay income tax on that withdrawal. Withdrawals from your RRSP are treated as income so you’ll pay tax at the same rate you would for any other earnings.
You’ll also have to start withdrawing money from your RRSP when you reach the age of 71. At that point, it gets converted to an RRIF (registered retirement income fund) and you’ll need to withdraw a minimum amount every year.
Don’t Wait Until the Last Minute If You Can Avoid It
Keeping the RRSP contribution deadline in mind is important to make sure you don’t miss it but you shouldn’t wait until the last minute if you can avoid it.
Banks and credit unions will be busy with all the last-minute contributions and the earlier in the year you contribute, the sooner your money starts earning the tax-deferred interest RRSP’s are so good for.
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