The time has come for everyone to pay themselves. You must have heard that saying: ‘pay yourself first.’ It is a central tenet of personal financial planning: if you pay yourself first (whether you are self-employed and write your own cheques or you are an employee and someone else writes them for you) then you will be setting yourself up for financial independence.
If you write your own cheques then you are well aware of what this means. If you do not write your own cheques, then this means paying yourself before you spend some money on frivolous activities or non-essential purchases. How do you pay yourself? Easy: You save.
Short-term saving and long-term saving are equally important. Putting away a few months’ expenses will go a long way toward cushioning the blow of a sudden illness or temporary unemployment. Having a nest egg for retirement is essential. We have a fairly healthy CPP program in this country, but the fact remains that it is only intended to play a supporting role in your retirement planning. Your own hard work and diligent saving is still going to be the star of the show.
For most people RRSPs are the best way to save for your retirement. You get the tax deduction now and tax-deferred growth while the funds remain in the RRSP. The deadline for contributing to your RRSPs this year is fast approaching. You must make your contribution by March 1, 2011 in order for those funds to be applicable towards your 2010 tax return.
The highest limit for contributions is 18% of your earned income to a maximum of $21,000 for the 2010 tax year. However if you have not contributed your full amount in previous years, then your contribution limit may indeed be higher still. Calculating your contribution limit does not have to be a daunting task. Here are a few easy ways to do it:
Check last year’s income tax Notice of Assessment. Your RRSP deduction limit can be found in the RRSP Deduction Limit Statement on your latest Notice of Assessment or Notice of Reassessment.
Call the Tax Information Phone Service (TIPS) at 1-800-267-6999. You will be asked for your SIN, your month and year of birth, and the total income you reported on line 150 of your income tax return for the previous year.
You can use the Canada Revenue Agency’s Quick Access service online (http://www.cra-arc.gc.ca/quickaccess/).
Or you can use the Canada Revenue Agency’s My Account service online (http://www.cra-arc.gc.ca/esrvc-srvce/tx/ndvdls/myccnt/menu-eng.html). This service will require registration for a Government of Canada ePass (http://www.cra-arc.gc.ca/esrvc-srvce/tx/psssrvcs/menu-eng.html). N.B. If you have ever registered for an ePass, all user IDs and passwords expired on October 4, 2010. To login to the CRA login services now, you must create a new CRA user ID and password. Once registered for the ePass, it will take some time (likely around 5 business days) to receive your security code in the mail.
As with all ‘money matters’ this is an important part of your financial well-being. Be sure to discuss which investments to choose for your RRSP, how best to maximize its performance, and where the RRSP fits into your overall financial plan with an independent financial planner.