The Registered Retirement Savings Plan, or RRSP, is a tax-sheltered investment account but curious who this is really suited for? Read on to learn about the 5 types of people who benefit the most from RRSP and see if you are one of them.
Income tax is dependent on how much you earn in a year, placing you in a different tax bracket. The higher the backet, the more taxes you pay so putting your money into an RRSP could be beneficial. From my experience as a financial consultant, anyone who is making more than $40K per year can start considering an RRSP to save on taxes. If you’re over $80K a year then you should definitely consider, especially if you are a 9-5 employee. Unlike being a business owner, employees do not have a lot of options when it comes to deducting their taxable income so an RRSP is a great solution to get more tax return.
If you make a bonus, the added amount can lead to the CRA taking up to 40% of that bonus away if you don’t plan accordingly. Consider putting that bonus into a RRSP! However, you should always consider your cashflow and speak to your accountant to see what is right for you.
Anyone who is planning to save their money for a long time should consider contributing to RRSP. Curious how long is long term? Well, RRSP does stand for Registered Retirement Savings Plan, so it is meant for retirement. So, if you’re needing your money in two months then an RRSP is not for you.
There is a contribution cap of 18% on RRSP which means you can save up to 18% of your previous year’s income. In my video on RRSP 101, you would have learned that the Canadian government set 18% because it is assumed that if you can save this amount, combined with a decent rate of return, then you should have enough for retirement in Canada.
Don’t plan on retiring? RRSP is a tool to help you reduce your taxes so once you max out on your TFSA, consider the RRSP.
Those with children or are nearing retirement are receiving or about to receive government benefits, but these benefits are connected to your income. Earn too much and you no longer qualify for those benefits so putting your income into an RRSP can help.
Here’s an example: those with children are eligible for the Canada Child Benefit if the household income is less than $200K. Over this amount and you will stop receiving these benefits so putting money aside into an RRSP to reduce your taxable income will increase your benefits.
For those receiving old age security and guaranteed income supplement, there will be a clawback when you make $79K a year. In this case, RRSP can help but keep in mind you’ll need to use it before you turn 71 as after this age, your RRSP becomes a RRIF where you’ll need to take the money out and pay taxes on it.
An RRSP can boost your savings and here’s how: for example, you make $100K a year putting you in the marginal tax bracket of 38%. For every dollar you make, 38 cents of that dollar is returned to the government in taxes. However, if you consider putting $10K into your RRSP, you roughly receive $3800 in your tax return. Do this for three years and you’ll be looking at $11.4K. While the amount doesn’t seem like a lot, it seems worthwhile when all you are simply doing is putting money from one account into another account with a 38% rate of return guaranteed.
Taking out your RRSP towards your first home with the RRSP home buyer plan allows you to take up to $35K towards your down payment or other home buying expenses. You’ll have 15 years to repay it without having the money taxed.
Selling your second property triggers a capital gain which you can expect 50% of the growth to be taxed. Here’s an example: if you bought a house for $500K that increases to $1M over time. Once you sell it, 50% of that growth ($250K) will be considered income and you’ll expect to give about half of it to the CRA. This also applies to your investments in the non-registered accounts and when you sell them, 50% of the gain will be taxed. Using an RRSP can help you reduce the weight of the tax load.
As a financial consultant for over 10 years, many clients ask me about the lottery or a life insurance payout. Unlike the United States, Canadian lottery is considered as windfalls and windfalls are not subject to tax. Life insurance is also tax-free which is why many will use life insurance to cover their final tax bills.
Did you fall into any of these 5 types of people? If you are looking for individual advice for your unique situation, book a 30 minute consultation with me and I’d be happy to review your finances! Or follow me for more education on how you can build your wealth in Canada on YouTube.
About the Author:
Thomas C.Chan has been advising for over 10 years and has built a reputation for his approach in developing personal finance strategies, setting up risk management, and accumulating wealth for Canadians.
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