Want A Bigger Tax Return? Let's Talk RRSPs.
It’s that time of year. The annual refresher on the RRSP account. There are so many types of accounts out there it often gets confusing differentiating between them. RRSPs, TFSAs, RRIFs, LIRAs, LIFs, RESPs, DPSPs, RDSPs. As a Certified Financial Planner, I have been required to take half a dozen exams relating to these account types — the details still get away from me from time to time. Luckily, the surface level features of the RRSP account isn’t all that complicated. Let’s quickly review:
In summary, an RRSP is just an account that holds investments or cash. Any deposits you make INTO the RRSP create a tax DEDUCTION. Any withdrawals you take from your RRSP results in TAXABLE INCOME (There are some exceptions, more on those later).
For example: Let’s say you earned $75,000 this year in wages. You have $75,000 in taxable income. Based on tax brackets in Manitoba, you will owe somewhere in the range of $18,000 in taxes. Luckily for you, your employer has likely been deducting taxes from your paycheck to bring this close to $0 by year end.
Now, if you were to put $10,000 of that income you earned into an RRSP, this triggers a deduction. Meaning that you will now only be taxed based on $65,000 ($75,000 - $10,000 = $65,000). Since you only owe taxes on $65,000, you will owe the government less — about $14,000 in taxes using Manitoba brackets. This means you will receive a tax refund at year end for approximately $4,000.
Not a horrible deal! The government is rewarding you for doing what you should be doing — accumulating a nest egg for your financial security and investing towards retirement. Here’s the catch, the deadline for the RRSP contributions to apply for this years tax return is March 1. So if you want to save a little money and create a tax deduction, you should consider having an RRSP open and making a deposit before the last week of February.
The work doesn’t end there. Once the money is in the RRSP you will have a variety of investment options. You can purchase stocks (shares in business), bonds (loaning money to organizations for interest in return), Real Estate Investments (Like REITs), it can remain in cash OR a multitude of other options. In this area, you will likely want to consult an investment specialist if you are unsure of how to structure it.
(In addition to this, if you’re considering becoming a little more financial savvy and “on top of things” — the team at Haven is more than willing to do a quick assessment to determine whether or not we could be a good fit as your advisor, in which case we would do all of the above work and guidance for you)
All the best!
Josh Olfert, CFP