How to Maximize RRSP, Minimize Tax Without Stretching Wallet

“Break the circle of 'Save' to 'Save'”

The moment we hit Dec 31st, other than exchanging new year wishes with friends and family, we make a balance of what was earned and putting stress on your savings to somehow save some tax.

Most people heard about the Registered Retirement Plan (RRSP) which suddenly turns into the most selling product by financial institutes, during the first 3 months of the year. On the contrary, it’s not explained well even if you see the short-term results right away i.e. tax-refund.

Jump to Maximize RRSP without stretching wallet

What is a Registered Retirement Saving Plan (RRSP)

Everyone tries to save a little bit of money for rainy days as well as for post-retirement when you will need a significant amount of money. The government of Canada promotes the concept of ‘saving for retirement’ by giving the incentive of ‘tax saving’ so that your overall saving for the future brings some extra cash in the form of a tax refund to support current financial health.

Instead of saving into a regular account, if the money is kept under a ‘registered’ account marked for retirement then its called Registered Retirement Saving Plan (RRSP)

Does it really ‘save’ tax or ‘defer’ tax

Canada Revenue Agency simply ‘postpone’ or ‘defer’ the tax on the amount within a yearly taxable income. The savings under RRSP is still taxable but not right now. Once you decide not to work any more a.k.a retirement, you obviously need money. At that time funds sitting in RRSP generate a regular income to meet your day-to-day needs. Every penny was taken out of RRSP/RRIF is taxable. Canada has a tiered system where the tax bracket is charged higher for richer income groups. The assumption here is the post-retirement your total taxable income would fall under ‘lower tier’ and hence the low tax liability. For example, if your current income touches the 40% marginal tax rate, post-retirement you would pay the tax at the rate of 25% on lower-income.

So in a way RRSP ‘defers’ tax and can be a candidate to ‘save’ tax eventually.

Compounding - Tax-Deferred

Imagine your savings are under a regular (non-registered) account where the returns or interests are taxed as part of the yearly tax return. Usually, banks issue T5 on any interest or dividend earned on savings or investments which are included in taxable income. Regular taxes reduced the total return on your savings. This is another advantage of saving under RRSP where any growth/return is not required to report as yearly income. The return becomes part of the original saving and helps to earn more for subsequent years. This is known as ‘compounding’ and that too tax-deferred.

Estate Planning

An important aspect, which mostly unknown, about RRSP/RRIF, is that how the left-over money will be treated by CRA post-death. This is rather a sensitive area which we all try to avoid talking about. But the fact is that this must be discussed and well planned to minimize the bitter experience your family might have to face. Remember that tax is only ‘deferred’ by CRA so the money sitting within Registered Plan should not be assumed as tax-free. All funds within RRSP are assumed as ‘income’ in the very last return after death. This can be a heart-breaking fact for the family who would have been expecting a large sum of money to be inherited. Missing or ignoring this fact can result in CRA to eat up a significant portion of RRSP as income tax. [Refer Estate Planning Article]

Maximize RRSP without breaking your bank

How much tax you can ‘save’ depends upon how much ‘savings’ you can park under RRSP. Sounds like going in a circle? There are better ways to break this loop.
You can ‘snatch’ the tax-refund you are expecting ‘after’ file return, even ‘before’ filing the tax return and use the same money to invest within RRSP. Sounds confusing?
An experienced Money-Simple financial advisor can help you.