Let’s talk about RRSP today!
And everything you should know about it.
RRSP, the registered retirement savings plan,
is an account that helps Canadian’s
to grow money for their retirement.
It sounds simple but there are a few important things
you want to know about your RRSP to use it to the max.
But how does it work exactly?
What kind of benefits will you get
and what pitfalls do you have to avoid?
We will discuss all of that and more in this video.
So make sure you watch it all the way to the end!
Hey how’s it going?
This is Thomas,
here to help Canadians to make better choices on their
Retirement, Wealth and Insurance.
My goal is to make sure
you can take 1 or 2 things home and implement right way,
Make sure you hit the subscribe button,
so you won’t miss my weekly video
I’ve structured this video into 3 parts.
First, we talk about the benefits of RRSP.
Then what other things you need to watch
Finally, I also want to talk about a few common misconceptions
that people have about RRSP.
Let’s go!
In general,
the RRSP has two big benefits and two side incentives
It helps you lowing your taxable income,
meaning you are paying less tax
and especially for those who are in 9-5,
that also means you are getting a bigger tax return!
It helps you grow your investments tax-free
within account until you take it out.
You might ask,
if I have to be taxed either way,
then why should I do it?
It’s because, instead of getting TAX Now,
a smart investor will always want to do TAX LATER.
Let time helps you to have more compounding growth,
and be prepared for the bill
But how does that work exactly
and how can you get maximum benefits?
Heads up, I am not an accountant,
so I will give a ballpark figure.
For the exact number,
please go to your accountants ok?
Let’s look at tax deduction first,
Many people call the RRSP a tax later account.
This is because when you put money into an RRSP
you don’t have to pay tax on your contribution
until you take it out again.
Let’s say, for example,
you earned 70k in a year,
and to make the math easy,
I will round the the tax bracket at 18 %.
Meaning you have to pay 12,600 to the CRA.
Let’s say you put $10,000 into your RRSP,
that will reduce your taxable income from 70k to 60k.
and your tax bracket will now will drop to 16%,
instead of the 12,600,
which now we are paying 9600 to the cra..
so you save approx $3,000.
Normally you get this as tax return in April.
Also now you have additional $10,000 is your account.
Lowering the taxable income with RRSP
is especially useful for people who are in a higher tax bracket.
But I’ll explain that in detail in a moment.
First, let’s look at how to grow your investments with RRSP.
As I said, RRSP stands for registered retirement savings plan
and that’s why many people think it’s a savings account.
But please treat it as an investment account.
You can hold stocks, bonds, and other investments in your RRSP.
There is no capital gains, interest,
or any other taxes within the account.
that money is protected from tax.
The general idea is that you want to put money
into your RRSP when your income is high
because you will be in a high tax bracket
and you take the money out when your income is lower
which is usually during retirement
Keep in mind,
when you take the money out it counts as income
and you have to pay taxes.
if you are income is low,
then your taxes will be realtively lower.
Then Thomas,
how do I know if my tax bracket is high enough
to make the RRSP worth while.
Generally, there are many layer of tax brackets,
that includes both provincal and federal so it can be very confusing.
To make it simple for you
I usually like to break it down into three tiers.
The first tier goes up to an annual income of about 40,000.
The second one is up to 80k
And the third up anything more.
And usually if you are in the first category,
don’t worry to much about your rrsp.
Foucs more on the TFSA,
vice versa, if you are in third tier,
I highly suggestly leverage the rrsp to further boost your saving.
Knowing your tax bracket will help you
to maximize your RRSP benefits.
For an accurate number, please go to the professionals
By now you know that an RRSP has attractive benefits.
But there are a few things you want to keep in mind.
The first thing is,
there is a limit to how much you can contribute to your RRSP.
In 2021, the contribution limit is 27.830.
or 18% of your previous income.
That’s the upper limit set by the CRA.
And for any unused room, you can carry forward to next year.
So for example, if you made 100.000 in 2020,
your RRSP room in 2021 would be 18.000.
you might be wondering what counts your income,
some example will be your work income,
income from your self-employment,
rental income and few more.
If you have incoporated,
paying yourself in dividend will NOT increase
your RRSP room next year.
If you have a pension plan,
that will share the same RRSP room,
so keep that in mind.
The next thing is the contribution time frame.
Normally you have one whole calender year to do it.
But CRA also let you use the first 60 days of the year
to count towards last years contribution as well.
The banks will market this as the RRSP season
and always promote the RRSP loan.
Oh by the way,
if you want to know more about the RRSP loan.
Rather if you should do it or not?
let me know in the comments
So if you have extra saving,
and want to lower down you tax bills,
you have until the 1st of March to decide but after that,
it’s too late.
Now, Let’s talk about the downside alittle more.
Why lot of people perfer TFSA instead of RRSP,
mainly because of the flexibility in withdrawl.
Since TFSA is using after tax money to invest,
therefore you cannot deduct your income,
but you don’t have to pay any taxes when you withdraw.
Verus RRSP is using pre tax money,
meaning you can deduct your taxable income right away.
But the withdraw will be treated as income of that year.
Meaning 100% will be taxed.
And since our ''Old Age Security''
one of the governement retirement benefit is income related.
Withdrawing too much in rrsp might reduce your OAS**
also another noteworthy thing about the RRSP
is the maximum age limit.
Once you turn 71,
the RRSP automatically becomes an RRIF.
RRIF has a minimum withdrawal meaning that
you are forced to withdraw a portion of pie
and you have to pay tax accordingly.
So keep that in mind for your retirement.
There are a few things people often misunderstand
when it comes to RRSP.
Number one
is that most people think that RRSP itself is an investment.
That’s wrong.
An RRSP is just an account, not an investment.
You can have term deposits in there,
you and also hold stocks or bonds inside your RRSP.
You will be surprised every time I asked a client,
what do you do with your RRSP accounts?
Most of them have no clue.
Like a coffee mug,
you can put water in it, you can put coffee,
and if you want you can put beer in it.
You can open several RRSP accounts
but the contribution limit stays the same.
Another misconception is that for RRSP
you cannot take the money out until your retirement.
That’s not true either.
RRSP itself do not lock your money,
the downside of taking money out is that
you have to pay taxes on and you lose the contribution room.
But there are no additional penalties.
There are two situations in which
taking money out of your RRSP can be tax free.
When you want to buy your first home
or when you want to go back to school.
If you want to buy a home, you can use the Home Buyer’s Plan.
It allows you to take out a maximum of $35.000, tax free
Keep in mind that you have to pay this money back
in a span of 15 years after
so Imagine it as giving yourself a interest free loan.
If you want to invest in your own education
you can take out up to $20.000
and pay it back in a timespan of 10 years.
These plans can be beneficial
but they’ll also reduce the amount of time
you have to grow your investments.
It can be a good idea to leave all your money inside your RRSP
and save up for a home elsewhere.
For ladies, A little rrsp hack for you.
If you are heading to your maternity leave this year,
you can consider lowering your last year taxable income
by contributing into rrsp in the first 60 days of this year.
That way you will receive extra tax return.
Then during your med leave this year,
your will be getting ei which means your income 50% lower,
now you take rrsp out, to even out the tax bill.
My Company provides RRSP matching,
but I don’t want to take It because
I feel the money is lock in for long period of time
listen to me, if your company offer this to you! Take it!
First of all, it’s free money!
It double your tax return.
And it’s a guranteee 100% return on your contribution.
It will be stupid not to take advantage of it.
And even you left the company,
9/10 times you can transfer it back to your own personal rrsp.
In the next coming weeks,
I want to talk about the pro and cons for rrsp,
should you do rrsp loan?
Or what is a spousal rrsp!
Stay stay tune for that!
And Now I’d love to hear from you.
What’s your experience with RRSP?
Are you currently using it and usually what do you do with it.
Let me know in the comments.
If you have any questions, feel free to reach out
I am more than happy to assist.
As always, thanks so much for watching this
and I will see you again next week!