How to reduce my taxes and keep my money
The answer could be quite simple – Contribute to your Registered Retirement Savings Plan! If you are working somewhere and have a little extra money saved up that you might not need right away, consider putting it into your RRSP. Don’t let the name of the plan fool you either, there are other benefits to putting money aside this way that aren’t for your retirement. If you think you might buy a home, or have thoughts of going into post-secondary education or training, there are programs that let you use this money without being penalized on taking it out. Even in the case that you do need that extra little cash, you can delay paying some of the tax now and likely pay less tax in a future year. Here are a few things you might like to know about RRSP’s that might just let you reduce your taxes and hang onto that money instead of giving it to CRA:
1. Limits
Sure, you’ve contributed to your RRSP’s in the past, or you might even have something set up monthly to come out of the bank before you see it. Maybe you already know a bit about RRSP’s and are waiting for the year to be over to see how much you can contribute, but are you aware of the maximum amount you can personally donate? Typically, it is 18% of your gross income each year, and accumulates every year. Therefore, if you haven’t contributed for 10 years and have been working that whole time making $40,000/year, you’ve got $72,000 you can contribute. Just make sure you don’t go over; CRA really doesn’t like that and you’ll be penalized on the over-contributed amount until you withdraw it, or the penalties eat it up. The best way to confirm the amount of available RRSP’s you can contribute is to look at your past year’s Notice of Assessment as this calculation will always be listed.
2. Impact
As a general rule, if you donate $1.00 to RRSP’s, about $0.25 will be saved on your taxes. That doesn’t seem like much on a small scale, but remember that this is your money, and when you put it into an RRSP, it stays YOUR MONEY. You are just placing it aside for a while, and when you contribute the amount you will reduce the taxes you owe, or increase your refund by roughly 25% of that amount (it is dependent on the income you had in the year, but it’s a pretty good estimate). So, if you are in the position where you expect to owe CRA $1,000, it might just be worth it to put $4,000 in an RRSP instead and keep the money in your hands. That $1,000 tax bill will now be a whole lot closer to zero. Of course, each person is different, and so is their annual income, but the savings occur for pretty much everyone.
3. Deadlines & Multiple Slips
RRSP Contributions typically run and are reported from March 1st of the year ended to February 28th of the year following, opposed to the January to December calendar year for which people file their taxes. This means that anyone who contributes to RRSP’s periodically will likely receive 2 RRSP Contribution Slips – One for March to December of the year ended (also known as Remainder of Year Contribution), and one for January to February of the year following (also known as a First 60 Days Contribution). However, 2019 is a special year for RRSP’s. First of all, it is a leap year, which means February 29th is the final date of the contribution period. Second, since February 29th falls on a Saturday, you actually have until Monday, March 2nd to contribute. These few extra days means you have a little more time to figure out if and how much you might want to contribute.
4. Home Buyers’ Plan & Lifelong Learning Plan
RRSP’s are quite handy to have for certain people since there are two common uses for using them outside of retirement. These programs allow anyone who contributes to an RRSP to gain the tax benefit of the contribution, but allows them to avoid repaying the tax for withdrawing the funds when certain conditions are met. The trick here is to be aware that any RRSP’s withdrawn for these programs need to be repaid over the course of the following several years. So as long as you contribute to RRSP’s and have the contributions continue, you should be able to take advantage of this tax break. HBP – The Home Buyers’ Plan, allows you use up to $35,000 to buy or build a qualifying home. Basically, this is your first home or any home that you buy after not owning a home for several years. If you rent, and want to own, this plan is for you. You can apply for HBP when you are going through the purchasing phase or setting up a mortgage, and you will be able to use RRSP’s to buy a home. That’s a pretty good deal considering those contributions already saved you some money over the last few years, and the catch is pretty easy to handle – The amount you use in HBP needs to be repaid over the course of 15 years following the year of the purchase. So, if you are using $30,000 this year (2020), starting in 2022, you’ll need to recontribute $2,000/year for the next 15 years. Any additional RRSP contributions will still give you the same savings, but if you don’t recontribute this minimum, it will be treated as income on your tax return that year. LLP – The Lifelong Learning Plan, allows you to use your RRSP’s to finance full-time training or education for you or your partner. So long as you are enrolled in a program that begins before the following March, you can transfer funds through the LLP. The benefit is similar to the HBP, but you have 10 years to repay the amount borrowed. If the training/education program continues past 1 year, you can continue to use the LLP each year until the program is completed. It is possible for you and your partner to both use LLP at the same time, and it is possible to use HBP also at the same time with the same benefits (provided you have enough in your RRSP’s to apply to both)
5. Other Reasons to Contribute
Keep in mind that there are other benefits to RRSP contributions, even if you aren’t planning for retirement just yet, or aren’t planning to use it for a home or education. If fact, maybe you just want to save the money right now because job markets are uncertain and you might find yourself unemployed in a few years and want to have some money put aside. Some key things to remember are:
Interest gained on RRSP’s are not taxed immediately like investments
Tax brackets increase every year, so paying tax on $1,000 this year is likely higher than $1,000 next year, or any year following
If kept until retirement/unemployment, it will be taxed at a substantially lower rate than this year because you’ll be retired/unemployed and not earning the same salary/wage you do now
If you need the money, it is still available to use so long as you know it will be treated as additional income
If something happens to you, your estate retains the money for your loved ones, unlike CPP
Our goal at Zablocki & Associates to help you save money, and what better way than to help you save money by keeping it in your bank. There are several different financial tools you can use to invest and grow your nest-egg, and we are more than willing to talk to you about the tax implications of your RRSP’s, TFSA’s, Dividends, Interests and Investments. If you would like to know more or get an estimate on how RRSP contributions might affect your taxes specifically, feel free to contact us at no charge!
– C. Zablocki