hey guys it's Adrian here the Canadian in a T-shirt and today I'll be answering a tax
question I get all the time should I contribute to my rrsp even if I have a low income and the answer
is yes but not always this is one of the most common misconceptions that I see all the time on
YouTube videos Instagram posts even news articles will have headlines which are frankly misleading
saying things like if you are a moderate income don't contribute to your RSP wait until you're at
a high income this sentiment is everywhere and it drives me crazy because it's only half correct so
I wanted to make a quick rrsp video answering this specific issue and with the rrsp deadline just a
few days away on March 1st the timing is perfect I've already made four videos about the rrsp
breaking down how it works the rules to follow tax deductions and withdrawals so check out my rrsp
playlist but to make sure we're all on the same page page I'll give a super quick summary now the
rrsp is a tax sheltered account designed to fund your retirement and it offers two main benefits
one it allows your Investments to grow tax-free this is extremely powerful and your investments
will grow much faster inside an rrsp than they would in a taxable account and two it allows you
to defer your taxes for years or decades until retirement you are able to reduce the amount of
taxes you pay now in your high income years and pay a much smaller tax bill when you retire and
are in a lower tax bracket let's say my income is on the lower side I make forty five thousand
dollars a year in Ontario that puts me in the lowest tax bracket combining both Federal and
provincial taxes my marginal tax rate is 20.05 percent that's how much I get taxed on every
dollar I earn in that bracket but on the flip side if I reduce my taxable income by contributing to
my rrsp I say leave 20.05 percent of that so if I put in five thousand dollars into my rrsp I can
save twenty point zero five percent of that from my tax bill that can save me one thousand and two
dollars and fifty cents and I'll receive this money as a tax refund in April when I file my
taxes so I save a thousand dollars good but not great remember I am in the lowest tax bracket and
so I am getting the lowest possible tax savings with my rrsp deduction what if I was at a higher
tax bracket let's say my income was sixty thousand dollars that puts me in the second tax bracket
both on the provincial and the federal side with a higher marginal tax rate of 29.65 percent now if I
made the same rrsp contribution of five thousand dollars I could save 29.65 of that so I save one
thousand four hundred and eighty two dollars and fifty cents and look at that with the same five
thousand dollar rrsp contribution I was able to save on an extra 480 dollars just because I was
in a higher tax bracket and if I was in an even higher tax bracket I would see even greater tax
savings clearly I saved more money with rrsp contributions in a higher tax bracket than a
low one that's a fact so like everyone says if I have a smaller income I should avoid the rrsp and
wait until I'm at a high income right wrong this is the frustrating part because people are only
seeing half of the picture remember what are the two main benefits of the rrsp tax shelter growth
and reducing your taxable income but this is the important part you do not need to claim that rrsp
tax deduction right away an rrsp contribution and an rrsp deduction are two separate things
and that's what people forget just because I put money into my rrsp this year that's a contribution
does not mean that I have to claim that tax deduction this year I can put the money into
my rrsp and carry forward that tax deduction to a future year when I'm at a higher tax bracket this
way I get to take advantage of both benefits I can put the money into my rrsp right away and
let it grow tax-free for years until I have that higher income and then I choose to claim that tax
deduction to get those bigger tax savings instead if I listen to the advice online and I avoid my
rrsp until I'm at that high income I lose out on years of tax-free growth and when it comes
to investing time is your greatest Ally so don't waste it this is exactly what I did while I was in
university I invested in my rrsp even though I had a tiny income from side jobs I knew I wasn't going
to claim those rrsp deductions since my income was so small there were barely any taxes to save but I
knew that the earlier I invest the more time my investments will have to grow and compound so I
started early I put money into my rrsp and I let my investments grow tax-free for three years until
till I graduated and had a high paying job and then three years later I decided to claim those
rrsp deductions which saved me a lot of money and this isn't hard to do I covered this in
my tutorial on how to file taxes in Canada but looking here when you declare your rrsp
contributions all you have to do is specify how much you want to carry forward to a future year
you can carry forward the full amount or you can claim some of it this year and some of
it next year it's up to you the point I'm trying to make is that you can and should contribute to
your rrsp even when you have a low income but this isn't always true let's say you're at the lowest
tax bracket with an income below 50k and your income will never grow throughout your career
this is unlikely but in this case the rrsp doesn't really make sense you're already at the lowest tax
bracket in your working years so in retirement you'll still be at the lowest tax bracket so the
taxes you save today will balance out the tax you pay when you retire it will base basically
be a wash again most Canadians won't be in this position and if you have a low income but you
put your ESP that's you're still getting the benefit tax-free growth I just don't want to
see you guys avoiding the rrsp and investing in a non-registered account why pay taxes on your
Investments when you have tax sheltered room waiting for you also note that when it comes
to U.S dividends either from stocks or ETFs those dividends will be charged of 15 withholding tax to
the US government even in a tfsa but if you hold those same U.S dividends in an rrsp you get to
waive that 15 tax just another reason to consider the rrsp even if you're at a lower income in my
case I never hold us dividends in my tfsa you can see here that my tfsa portfolio is exclusively
Canadian Investments all of my U.S dividend stocks that you'll see on my Blossom page like Coca-Cola
Procter Gamble Pfizer McDonald's I only hold these U.S dividends in my rrsp account to avoid paying
any taxes on them and if you guys want to see my full Investment Portfolio and follow me every time
I buy buy a stock you can do it for free click my referral Link in the box below to download The
Blossom social app and connect with over 10 000 Canadian investors we're really trying to bring
more transparency into the world of investing and we're growing every day so I hope to see
you there and check out my announcement video where I talk all about it thanks for watching
guys and be sure to like comment and subscribe if you found this video helpful every thumbs
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and I'll see you guys on the next episode of the Canadian in a t-shirt bye guys thank you