EverywhereI go, I hear it's RRSP season until March 1st, 2021. Today we visitthe exciting world of RRSPs in celebration of RRSP season.
What is an RRSP?
A Registered Retirement Savings Plan is an incentive from the government to have you save towards retirement. RRSPs have increased in flexibility throughout time, allowing you to use the money towards buying your first home or going back to school to change careers. For this post, we will solely focus on the benefits of an RRSP.
How Do They Work?
Long story short, all contributions made into an RRSP reduce your taxable income for that year by the amount you contribute. Personally, I am a big fan of examples.
Let us say I am employed, earning a salary of $80,000 annually. I do not have a group retirement plan, and I am responsible for all of my own retirement savings.
As you can see,the $10,000 contribution lowers my taxable income, and therefore lowers the taxes I pay! My employer deducted too much taxes on my behalf ($16,825.00 vs.$13,710.00), and I would receive a tax refund of $3,115.00 – happy days!
But What's the Catch?
There is no catch as long as you understand the RRSP defers your tax – not eliminates it! When you retire and start to pull money out of your RRSP (called a RRIF), all the money withdrawn is taxable – similar to employment income butwithout those CPP/EI deductions.
Do RRSP's Work for Everyone?
Before the Tax-Free Savings Account (TFSA) in 2009, RRSPs were the only option people had. RRSPs work best for people making over $50,000 per year and at retirement will be lowering their income tax bracket by 1-2 rungs. Think of it as you get a more significant tax deduction during your employment years. In retirement, when you need less income, you are paying a smaller marginal amount. Big initial tax-return and small(er) future tax bill!
If you make under $50,000 or are keeping the same income in retirement, fill your TFSA first!
Wrapping It Up (cue the orchastra)
RRSP season ends March 1st, 2021 this year. The first two months of the year allow you to put money in your RRSP this year to lower your taxable income from 2020 while saving for retirement. These two months provide a cushion to look at your income from last year (last paycheque in Dec or T4) and lower your potential taxburden.
Looking to open an RRSP or TFSA, we do that! Click here to book a call.
