The months of January and February are traditionally known in the financial industry as “RRSP season” since you have only until March 1, 2013 to make a contribution if you want to claim a deduction on your 2012 tax return.
When we make an RRSP contribution, what are we really doing? We are effectively setting aside some of our income for consumption at a later date, which for most people, is retirement.
The government, through the RRSP system, gives you two incentives to encourage you to defer consumption to a later period in your life, in an attempt to smooth out your earnings among the years of employment through the years of retirement: a tax deduction for your contribution and the ability to earn what is effectively “tax-free” investment income on your after-tax contribution.
While many people cite the tax deduction as the main advantage of contributing to an RRSP, it’s only worth something if you find yourself in a lower tax bracket at the time of withdrawal than you were in the year you made the contribution. Otherwise, the tax deduction itself is worthless and the only tax advantage is the ability to earn effectively tax-free investment income.
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