Here’s How an RRSP Can Work to Your Advantage
Saving money on taxes, combined with the benefits of a structured plan for retirement. These are the two main reasons for taking out a Registered Retirement Savings Plan (RRSP). Exactly how this works and some other, less obvious benefits, are worth a closer look.
Lower Your Income Tax Bill
For the 2020 tax year, your RRSP contribution threshold is 18% of your income, to a limit of $27,830. You can claim RRSP contributions as a tax deduction, to reduce your net income.
This is especially valuable if it puts you into a lower tax bracket. Your Financial Advisor can help calculate where this threshold is for the 2020 tax season and advise if an RRSP could benefit you in this way.
Contributing to an RRSP during your peak earning years will help offset being in a higher tax bracket. If you’re at the beginning of your career, you are likely in a lower tax bracket than you will be, eventually. However, you can begin an RRSP today for the investments which will compound nicely over time. Then, you can defer claiming your contribution because you anticipate that your income will soon rise.
Grow Your Retirement Egg Tax Free
Contributing to an RRSP is a structured way to actively save for your retirement. You reap tax benefits today, and your contributions grow as tax- free investments until the day you need the money to retire with.
Lower Your Lifetime Tax Rate
The funds you contribute will not be taxed as income until you retire. At that point, you are likely to be in a lower tax bracket. You are effectively deferring the tax until your income drops.
Borrow from Your Fund to Enhance Your Life
Both you and your spouse or common law partner can borrow from your RRSPs to pay for education expenses, or create the down payment on your first home, tax free. You are effectively making yourself a loan of your own savings, but it can be especially valuable in these two instances. For more information, check out the Home Buyers’ Plan (HBP) and the Lifelong Learning Plan (LLP).
Include an RRSP in your tax strategy, to help save for tomorrow while enhancing your life today. Ask your Financial Advisor how to make this savings strategy work even harder for you.