Lower Your Tax Bill by Contributing to Your RRSP

To begin, this is just a friendly reminder that the deadline for RRSP contributions for the 2017 tax year is Thursday, March 1, 2018.

You may be asking yourself… what investments should I be holding inside of my RRSP? Well, when deciding which investments to keep inside of your RRSP (Registered Retirement Savings Plan) or RRIF (Registered Retirement Income Fund), keep in mind that investments which are taxed at the highest rate benefit most from being held inside of a registered account. This is due to the fact that income earned (capital gains) in a registered account is not taxable while it remains in the account so it can grow tax free until the money is withdrawn (typically after retirement, when your tax rate should be lower). This also applies to dividend and interest income.

Let’s run through some scenario’s to outline the tax savings you receive for contributing varying amounts at different levels of income to an RRSP.

Scenario 1: Your annual taxable income is $45,000 and you contribute $2,000 to your RRSP. In this case, your tax savings will be $483 assuming the RRSP contribution amount is fully deductible. If you were to contribute double the amount, $4,000, your tax savings would be practically double at $944.

Scenario 2: Your annual taxable income is $80,000 and you contribute $5,000 to your RRSP. In this scenario, your tax savings will be $1,574 assuming the RRSP contribution amount is fully deductible. On the other hand, if you were to contribute half the amount, $2,500, your tax savings would be approximately half at $787.

An RRSP must be converted to a RRIF by the end of the calendar year in which the account holder turns 71.  In addition, RRIF account holders are required to withdraw a minimum amount each year, starting the year after the RRIF is established, when they are 72.

That’s all for this week; thanks for reading! If you have any questions or are in need of any assistance, feel free to reach out to me at ramona@ramonacga.com. If you found this post helpful, don’t forget to leave a like, comment, or to share it. And don’t forget to tune in for future posts in our Tax Tips Blog!