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The low down about RRSPs & Tax shifting hacks - everyone should know about!

This sentence should grab your attention: Contribute $26,000 to your RRSP, and with this single step, save a potential $14,000 in tax.

Wow, that’s a lot of savings… but What’s the point of using an RRSP?

Before we start, how does a RRSP work?


The Registered Retirement Savings Plan (RRSP) is a registered account, its not a type of investment - think of the RRSP as an empty bucket that you have to fill up!


The Candaian revenue agency (CRA) allows working Canadians and business owners to contribute by putting cash savings (into their very own RRSP bucket) and use the contribution amount to write off their taxable income.

Simply put, an RRSP contribution reduces your marginal tax rate –which reduces you taxable income and will generate a tax refund (you will receive $$$ from the government)

Assuming you paid your taxes in full during your working year, you would be entitled to a refund of (the difference between the taxes you paid during the year and taxes you should have paid on your reduced taxable income).

Example: Samantha lived and worked in Quebec last year and earned $ 90,000 of income – she paid $24,811 in combined fed. & provincial income tax.

Samantha makes a $15,000 RRSP contribution, effectively lowering her taxable income to $75,000 – she should have paid $19,243 in combined fed. & provincial income tax.


She receives a refund of $5,568 ($24,811 - $19,243) - The refund you receive is your money – money that you essentially overpaid the government during the year. Please don’t get that confused with “Free money” it’s not!

Now, this is where most people book a beautiful holiday, or buy a brand new TV with their refund check----- Please, for the love of every financial god out there, DON’T be like most people, because most people are managing their finances ass backwards.

Here’s what I mean:

Your RRSP contribution lowered your taxable income. The day you withdraw your money from your RRSP account, it will be ADDED to your taxable revenue (minus certain specific occasions – see below) – you will have to pay taxes on that money.

So to make your original RRSP contribution “Whole”, you need to re-contribute your RRSP refund check either into your RRSPs (which yes, would generate a new RRSP contribution) or into your TFSA, which would the grow tax free!

Now, to fully benefit from the tax sheltered advantage of the having your money in an RRSP - You need to make sure that you money is working for you.

You need to choose an investment type for you cash holding (I recommend you work with a professional to help you find a suitable investment strategy) to help you grow your assets for years and years, even decades, and all without ever being taxed, until you withdraw.

Wait what there’s even more about RRSP’s and they aren’t only for retirement! If you’re a smart cat, you can even withdraw a lot of that money little or no tax, prior to retirement!

Sadly, a lot of people, including contract workers and millennials, don’t understand this at all. Worse, they have no intention of using an RRSP ever… mostly because they feel retirement is a far away and it’s hard to imagine what 30 years down the road looks like, understandably so.

RRSP isn’t necessarily for retirement but rather for the purposes of tax-shifting. Here are some examples:

1) You’re buying or building your first home – withdraw up to a maximum of $35,000 from your RRSP – without having to pay tax – you now have 15 years to pay yourself back at 0% interest!


2) You’re in the fast gig economy and need a sabbatical between jobs? Live off the RRSP money, go travel overseas to Asia, and don’t stress about it too much!

3) Did the company you work for not need you anymore, so they and laid you off? You can use the cash in the RRSP to live for the time being till you get back on your feet.


4) Your significant other is expecting, or you yourself got pregnant? While you used the RRSP for saving and growing money when working, use it to finance the maternity leave (pregnancy) at little or zero tax.


5) If you earn more than your spouse, open a spousal RRSP account. You can contribute up to your contribution limit and get a tax return for doing so. After 3 years he or she can then withdraw it and pay tax at a lower rate. Bang! you just did income-splitting between you and your spouse.

Tax shifting tip: Combine 4 and 5 for even more awesome tax savings. How do you do this? Plan to have a baby 3 years after you contribute, and the plan savings in the spousal RRSP can be take out to fund the mother’s time at home at minimal tax expense.


Tax shifting bonus tip: Use the RRSP tax refund (what a great strategy!) to fund your TFSA. I personally do this every year to fill the TFSA up to the brim!


Tax shifting tip Bonus, Bonus tip: Make an RRSP contribution, get a refund for doing so, then use both to buy a home with a bigger down payment. Best result of all, you will not trigger any tax from this. Home Sweet Home!

Now you know! RRSP planning – there is never a one sizes fits all type approach!

What to know more, send me your questions at jacquesmichel.grimaudo@canadalife.com !

-Jack

***This content is being shared for educational purposes only and does not form part of any recommended strategy or direct advice being given. I recommend that you always consult a professional prior to implementing and type of financial planning strategy to ensure that it aligns with your personal situation!