It is a known fact that many\npeople do not like the RRSP and some even go as far as to say that\nthey hate the things. Even accountants hate them \u2013 they always say\nthat a dollar today is better than a dollar tomorrow yet when the\nquestion \u201chow can I reduce my tax bill comes up\u201d the default\nanswer is often \u201ccontribute more to your RRSP\u201d. A dollar today is\noften better than a dollar tomorrow but you also want to have a\ndollar tomorrow for retirement and everyone knows deep down that the\nCanada Pension Plan (CPP) and Old Age Security (OAS) will not\nnecessarily provide you with a good retirement, if they exist when it\nis your turn to retire.<\/p>\n\n\n\n
The RRSP does have its place in your tool box \u2013 it creates a deduction against your net income, a deduction not a credit. For people in a higher tax bracket this makes a difference \u2013 please refer to my previous post \u201cDeductions and Credits: The Difference<\/strong><\/em>\u201d for clarification if necessary. I will emphasize on what I believe to be the key point by using an example of an individual in the 30.5% tax bracket living in Alberta who has invested $1000.00 (The rate is 10% in Alberta and 20.5% Federal) versus the lowest rate in Alberta of 25% (10% Alberta, 15% Federal).<\/p>\n\n\n\n If you are in the 30.5% tax\nbracket the $1000.00 deduction will reduce your tax payable by\n$305.00 \n<\/p>\n\n\n\n If you are in the 25.0% tax\nbracket the $1000.00 deduction will reduce your tax payable by\n$250.00<\/p>\n\n\n\n A $1000.00 non-refundable\ntax credit on the other had will reduce your tax payable by $250.00<\/p>\n\n\n\n That is why the RRSP really has no effect in the lowest tax bracket. Although it may be beneficial in two unique cases. Please note that these two programs are like a loan from yourself and that the tax bracket argument down below applies to this as well.<\/p>\n\n\n\n The home buyer\u2019s Plan \u2013\nYou can borrow up to $35 000.00 from your RRSP to put down on a first\nhome. You have two ways to pay it back, by contributing to the RRSP\nor by adding 1\/15 of the amount withdrawn into income (You have 15\nyears to pay it back). If you are in the lowest bracket it isn\u2019t a\nbad thing to take it into income.<\/p>\n\n\n\n The Lifelong Learning Plan \u2013\nYou can borrow up to $20 000.00 from your RRSP towards your\neducation. You have the two same ways to pay it back as above \u2013 the\nonly difference is you have 10 years to pay it back.<\/p>\n\n\n\n One neat thing that people\nmay or may not know is that you can carry your RRSP contributions\nforward until you want to use them, some accountants I know of will\napply them yearly regardless. As a result, if you run into that\nbanker who says you should set up a pre-authorized checking (PAC)\nplan for $25.00 per month \u2013 you can accrue your yearly $300.00 RRSP\ncontributions until you are in a higher tax bracket when they will\nsave you a minimum of an extra $55.00 per thousand. Another important\nthing to consider about the RRSP is that you save\nfrom the first dollar earned (dollars before tax).<\/p>\n\n\n\n It\nis important to know that despite the fact that the RRSP does create\na deduction against income, it is to be used as a tax deferral \u2013\nthey are NOT tax free. Some people I speak to say, why would I put\ninto the RRSP \u2013 I am double taxed. When looking closer at the\npicture, you are not double taxed at all \u2013 remember the RRSP is a\ntax deferral \u2013 NOT tax free. You get the deduction and savings when\nyou contribute to and apply the RRSP contribution to your tax return\n(You saved from the first dollar earned). It is correct that you pay\ntax when you go to withdraw because, in practice you were not taxed\nyet. One of the biggest problems I often see, is people will withdraw\nthe RRSP when they are in a higher tax bracket or will withdraw and\nthe income inclusion will put them into a higher tax bracket. If you\nwithdraw the money at a higher tax bracket than when you contributed,\nit defeats the purpose. I\u2019ll illustrate by using the example above.<\/p>\n\n\n\n If you are in the 30.5% tax\nbracket the $1000.00 deduction will reduce your tax payable by\n$305.00 \n<\/p>\n\n\n\n If you\nare in the 25.0% tax bracket the $1000.00 deduction will reduce your\ntax payable by $250.00<\/p>\n\n\n\n If you\ncontributed in the 30.5% bracket and withdraw in the 25.0% bracket,\nyou will have saved tax at $55.00 per thousand. However, if you\ncontributed at the 25.0% bracket and applied the deduction and\nwithdraw in the 30.5% tax bracket, you will have paid $55.00 per\nthousand more in tax. Please note that this example holds true for\nboth the Home Buyer\u2019s Plan and the Lifelong Learning Plan.<\/p>\n\n\n\n The\nRRSP is not for everyone; it is a strategy that should not be used as\na bank account, sometimes the Tax Free Savings Account (TFSA) may be\nbetter. I will explain the tax differences in an upcoming post titled\n\u201cWould You Rather Pay Tax on the Harvest or the Seed?\u201d.\n<\/strong>When looking at these\nstrategies \u2013 it is always good to review your unique situation with\nan independent tax advisor or planner, sometimes it is good to get a\nsecond opinion as well because no one person knows everything.<\/p>\n<\/body>","protected":false},"excerpt":{"rendered":" It is a known fact that many people do not like the RRSP and some even go as far as to say that they hate the things. Even accountants hate them \u2013 they always say that a dollar today is better than a dollar tomorrow yet when the question \u201chow can I reduce my tax … Continue reading “In Defense of the Registered Retirement Savings Plan (RRSP)”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"om_disable_all_campaigns":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[5],"tags":[],"class_list":["post-232","post","type-post","status-publish","format-standard","hentry","category-tax-and-financial"],"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/taxpaws.com\/index.php\/wp-json\/wp\/v2\/posts\/232","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/taxpaws.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/taxpaws.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/taxpaws.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/taxpaws.com\/index.php\/wp-json\/wp\/v2\/comments?post=232"}],"version-history":[{"count":1,"href":"https:\/\/taxpaws.com\/index.php\/wp-json\/wp\/v2\/posts\/232\/revisions"}],"predecessor-version":[{"id":233,"href":"https:\/\/taxpaws.com\/index.php\/wp-json\/wp\/v2\/posts\/232\/revisions\/233"}],"wp:attachment":[{"href":"https:\/\/taxpaws.com\/index.php\/wp-json\/wp\/v2\/media?parent=232"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/taxpaws.com\/index.php\/wp-json\/wp\/v2\/categories?post=232"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/taxpaws.com\/index.php\/wp-json\/wp\/v2\/tags?post=232"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}