BY: FAZAAD BACCHUS
Make use of the tax advantage. There are two things that we have been told that must come to pass, one is we must all die and the second is that we must pay all our taxes; here in Canada we are no stranger to the latter. Taxes are an everyday subject with the Government finding more and more ways to tax its citizens albeit for the growth of the country and security of its citizens. However, there are tax advantage programs that the government has implemented which allow us the opportunity to save on taxes. One such way is the use of an RRSP.
Apart from the fact that it is one of the most advantageous methods of saving, it also provides you with a healthy retirement. The employment of compound interest plays a significant role in growing your money. You have access to many investment vehicles to choose from: GIC’s, Mutual Funds, Stocks or Bonds and you can choose from either banks or investment companies, both with their pros and cons.
Specifically, for the 2016 contribution year the maximum you can save based on that year’s income is $25,370. The way to calculate the amount applicable to you is to calculate 18% of your 2015 earned income then subtract any pension adjustment on your 2016 T4 slip. Now add any contribution room that you have brought forward; this will give you the amount that you can contribute. An easier way is to look at the Notice of Assessment and that should give you your RRSP deduction limit.
It’s possible that you may have deferred your contributions and find yourself with a large contribution room. If this is the case you may be better off utilizing this room in your highest earning years so as to maximize the taxes saved. As an example, if you are in the 25% tax bracket or 25 % MTR then you will save $250 on every $1,000 that you contribute. However, if you are in the 45% tax bracket or 45% MTR you will save $450 on every $1,000 you contribute. So, as you can see utilizing your contribution room in your higher earning years would be more beneficial to you.
Just a point to note here also, when making withdrawals from your RRSP make them at a time your income is at the lowest. Reason being the lower your MTR the lower your tax bill. This is the whole idea behind the RRSP; you save when your MTR is high and withdraw when it’s low.
Some clients choose to save but not use the RRSP, they prefer an unregistered account. Why pay the Government all that tax when you could be saving a portion of it? Remember that the portion you save from taxes also compounds tax free! This means that there is double growth on your money, so why walk away from such an investment opportunity?
Finally, remember not to over contribute as there are fines which can add up and be a hefty sum if left to accumulate. There is a lifetime limit of $2,000 and anything over that is charged at 1% on the over contribution. RRSP’s can be complex if you haven’t been investing in them, however a financial advisor understands the concept and can help you with the planning process. Find a good one and maximize on the tax advantages of it.