Do you hear the clock ticking … time is running out if you intend to contribute to an RRSP.

The deadline for contributing and using it on your 2011 income tax return is Feb. 29, 2012. The deadline, usually March 1, is different because it’s a leap year.

What is also different this year is the slight increase in the amount you can contribute. For 2012, the contribution limit is 18 per cent of your income in 2011 to a maximum of $22,970. 

The federal government introduced RRSPs in 1957 to encourage Canadians to save for retirement.

The biggest benefit is the immediate tax savings, says David Gillan, vice-president of T.E. Wealth. “You get a tax deduction for the year that you put it in.” Your total income is reduced by the amount you invest in your RRSP. That means you pay less tax and are left with more of the money you earned, says Gillan.

“RRSPs are also a good savings plan … they keep you disciplined,” says Jillian Bryan, an investment adviser at TD Waterhouse, Vancouver. If you are paying into a plan like this, it’s hard to pull the money out and you will be less likely to do so. 

Furthermore, every dollar grows without attracting any tax through its accumulation, says Richard McKenster, spokesperson for Advocis (the Financial Advisors Association of Canada), Halifax. “If the fund earned six per cent, the fund earned six per cent.” 

In most cases (and this is where a financial planner can help), you will be in a lower tax bracket when you are retired and, as a result, the “income” from your RRSPs will be taxed at a lower percentage rate.

Keep in mind that if you have a spouse, says Bryan, you can set up a spousal RSP and income split with the higher income earning spouse. Again, you will save because of the lower tax bracket.

RETIREMENT PLANNING
Retirement planning is a continuum, says McKenster of ADOCIS, beginning when you finish school and continuing through your working life. “It’s all about at some point cashing out and retiring and using income from investments rather than earned income.”

“And it’s not that painful when you’re methodical about contributing,” says Bryan. “If you don’t want to do a budget, then just pay yourself first (take 10 per cent however often you get paid) and make sure you are maximizing your contribution.”

The earlier you start, the richer the whole process becomes.