Do you need to contribute to RRSP?
The Registered Retirement Savings Plan or short RRSP
is a tax-sheltered investment account where
you can also deduct your taxable income
indeed there are lots of benefits
but whom is it really suited for?
Today we will have a look at the 5 types of people
who will greatly benefit from an RRSP.
Keep watching to find out if you are one of them.
Hey how's it going?
my name is Thomas,
here to help you make better choices on
your Retirement, Wealth, and Insurance
my goal is to make sure you can take 1 or 2 ideas home
and make a smarter financial decision
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Let’s jump into it!
Now, which types of people benefit most from
putting their money into an RRSP account?
The first type of person who should have an RRSP
is anyone who plans to save money long-term.
But what exactly does long-term mean?
After all, the acronym for RRSP is
registered retirement savings plan.
It’s supposed to contribute towards your retirement.
So If you need your money in two months from
now to buy a new computer,
then it’s better to put tt somewhere else.
But if you can confidently say
that you’ll save this money for longer terms
and you know your future tax bracket is lower
than what you are currently at.
then RRSP is the perfect option.
The RRSP has a contribution cap of 18% -
which means, you can save up to 18%
of your last year’s income.
If you watched my video last week,
reason why the Canadian government set this 18%,
is because if you can save around 15 to 18% of your income
with a decent rate of return say 6-8%.per year.
Then you don’t have to worry about your retirement saving..
You might say, well Thomas, I don’t plan to retire!
And that’s ok too!
Remember,
RRSP is a tool to help you reducing your tax payment
and keep the CRA’s handoff. So once you max out
your TFSA, then you can consider putting it in the RRSP.
As you might know, your income tax depends on
how much you earn in a year. Depending on your
earnings you will be in a different tax bracket. If you
are in a high tax bracket, putting some money in an
RRSP is a wise decision.But what does “high” mean?
It’s a relative word, right? From my experience,
everyone who is making over 40K a year can start
considering an RRSP to save on taxes. And if
your income is over 80K a year then definitely
should look into having an RRSP. Especially for
the 9 – 5 employees, unlike being a business owner,
there is not much stuff for the employees to deduct
their taxable income. So RRSP will be simple yet
effective strategy to get more tax returns. Also, a
lot of companies like gaming companies or tech
companies give out bonus, It’s great to have that
extra 4 digits or even 5 digit paycheque. But if you
don’t plan accordingly, the CRA will come and take
20 30 or even 40% of that bonus away from you.
So putting the bonus into the RRSP might be a good
idea. But always consider your cashflow first
and speak to your accountant for details.
If you have children or if you are nearing retirement,
you are in a unique position to get government benefits.
But those benefits are connected to your income. If
you earn too much money, the benefits are gone.
Putting money in an RRSP can help.
Let’s look at a specific example:
If you have kids, the Canada child benefit is income-related.
If the income of the whole household is more than
$200,000 a year then you’ll stop getting the Canada
child benefits. So put some money into an RRSP to
reduce your taxable income and increase your benefits.
The same is true for those who are receiving old age
security and guaranteed income supplement. There
will be a clawback once you make 79K a year.
$79,000 might seem a high number, but imagine you
been saving for the past 20 / 30 years, and by
snowballing your investment while receiving a nice
pension. it can be done. In this case, RRSP can help.
However, Keep in mind, though, that you can only use
your RRSP until age 71. After age 71 it becomes a RRIF
and you are forced to take the money out and that you
need to pay tax on.
Oh by the way, if you want to know how to make a
financial breakthrough this year, I have prepared a
30-minute masterclass for you. There you will learn
how to avoid common money pitfalls and how to
save smarter. So be sure to check it out!
No.4 First Home Buyers
If you are looking to buy your first home in the
next 3-5 years, then an RRSP is perfect for you.
The tax return from RRSP will boost your savings.
Imagine you make $100,000 dollars a year.
That puts you in the marginal tax bracket of 38%.
That means for the next dollar earned, you have
to pay 38 cents of that dollar earned to the
government. say you put $10,000 into your RRSP,
in theory, you roughly will get $3800 in a tax return.
Do that for 3 years, you get $11,400 on top of your saving.
Yes that $11,000 might not be a huge number compared
to the real estate price anyway. But from another perspective,
what I do is simply moving from account A to account B,
and now I get a 38% rate of return guaranteed. A dollar
saved is a dollar earned right?
I know what you are thinking - but Thomas,
when I take the money out after 3 years from the RRSP
then I have to pay tax 100%! So how will that
help me to buy a home?
Well, usually you do have to pay tax when you
take money out of your RRSP. But not if you use
the RRSP home buyer plan. The RRSP home buyer
plan allows you to take out money without any
withholding tax up to $35,000 and use it towards
your down payment or other home buying related expense.
And you have the next 15 years to repay it afterward.
The final group of people who will benefit from an
RRSP are those who want to sell their second property.
Besides from your princple home, when you are selling
your second property, you’ll be triggering a capital gain.
50% of the growth will be tax…
Let’s look at an example. You might have bought
a house for $500.000. Over time it goes to $1million.
If you sell it, 50% of the growth which is $250.000
will be considered as income and pretty much you
have to pay half of it to the CRA. And this can also
apply to your investments in the non registered accounts.
especially in 2020 where the tech stocks and cryptocurrency
went off the roof. When you sell them, 50% of the gain
will be considered taxed. Using an RRSP can help
you reduce the weight of the tax load. Oh I do have
clients ask me, what about lottery or life insurance payout.
Unlike the state, our lottery is considered as windfalls,
and windfalls are not subject to tax.
And for life insurance, it’s also tax-free. And that’s
why a lot of people will use life insurance to cover
their final tax bills
But…… that’s another topic that
I will cover in the future!
And there you have it, these 5 types of people
will greatly benefit from using an RRSP.
If you enjoyed this video, please send this video to
your friend or family members who are not sure
about RRSP. And definitely watch out for my
next video where I talk more about the RRSP loan!
If you are looking for individual advice for your
unique situation, click the link in the description.
And I will see you in there!