Hey, this is Thomas and Welcome Back.
In this video,
I will talk about some updates about RRSP
this year and what are some best ways to
utlize the RRSP so you can minimize your
tax bill and maximize your long-term growth.
As you probably know,
RSPs are a huge subject and with so much
to cover I've broken it down into two parts.
First I will go over the benefits of RRSPs,
the contribution limits and the rules you
need to follow so you don't get penalized..
And in the second part,
I'll go over RRSPs withdrawals and blind spots
and I'll talk about what kind of investments to
put into your RRSPs to
maximize your tax efficiency.
Now before we move on,
please don't forget to like and subscribe
this channel for more content on
how money works in Canada.
Let’s get started!
RRSP stands for
Registered Retirement Savings Plan,
and it is probably one of the most important
tax-sheltered accounts offered in Canada
They offer two main benefits.
First,
it allows you to defer your taxes to a future year.
When you put money into an RRSPs.
you will be able to reduce the amount of taxes
you paid this year and
delay those taxes until you retire.
At that point,
you should have a smaller tax bracket
and so you will pay less in taxes.
For example,
your taxable income this year is $100,000.
And that put you in
approximate 25% tax bracket.
If you are a typical employee,
your company will always deduct
the tax part form your pay cheque.
Then in april, CRA will know that.
Oh I need to tax you $25,000,
but you prepaid me $30,000.
Ok I am going to return you $5000.
Now how RRSP kicks in is that
if you contribute $20,000 RRSP this year,
then your taxable income will become 80,000
which means we need to pay the CRA
around $19,000.
And this is interesting part.
Your work usually don’t know
how much you contribute to your RRSP,
so they still going to deduct the
same amount from your pay cheque.
And by the time is April,
CRA realized that hey,
you prepaid 30,000
but now CRA only need to take $19,000.
So they are going to give back $11,000
instead of $5,000 as tax return!
The second benefit is that your RRSPs allows
your investments to grow tax-sheltered.
This means any income you earn inside
your RRSP will not be taxed until
you take it out of the account..
So any dividends, interest,
or capital gains where you might need to pay
the CRA every year but now you get to defer it.
This is huge because your investments will grow
much faster inside an RRSP than they would in
a regular account that will be taxed annualy.
The tax shelter nature of an RRSPs is
very similar to the Tax-free savings account.
The main difference is that with an RRRSPs
you reduce your taxes today.
And so you have more
initial money to invest with,
Yes it’s true you will have
to pay the tax eventually.
But now you have the next
20 – 30 years to plan accordingly.
In an RRSP you can hold
almost any form of investment
like stocks, mutual funds, bonds,
ETFs and even cash.
As long as these assets remain inside your RRSP,
you won't be paying any taxes on them.
I want to stress this point just because you
can hold cash in your RRSP but if you only
put it in a regular savings account for
a long term until you retire,
you will earn at best a 1% interest rate
which isn't even inflation these days.
Yes there are risk with investing
into the stock market,
but with proper planning,
the income you earn from stocks and mutual funds
will far surpass the 1% interest rate.
Saving money on tax is great, isn't it?
So the question you need to ask yourself is
how much money can you put into your RRSP?
Your RRSP contribution room
depends on your income every year.
Your contribution room will increase by 18%
of your earned income in the previous year,
but it's capped at a maximum value
which was $29,210 this year.
So if your earned income was $60,000 last year,
you will have gained 18% or
$10,800 of RRSP contribution room.
But if your earned income was $250,000 last year,
18% of that is $45,000 which
above the maximum amount.
And so your contribution room would be limited
to the maximum amount of 29,210
Plus all carry over room.
But what counts as earned income?
It includes all your pre-tax employment,
your net self employee income,
and any net rental income are
all considered earned income.
As an example, let's say your salary is
$50,000 as reported on your T4,
but you also Uber on weekends which you got
$10,000 and you paid $2,000 in gas
which would count as expenses.
Your net income from Ubering would be $8,000.
And let's just say you rented your
basement suite out and made $18,000.
If you add all this together you get
an earned income of $76,000.
Now take 18% of that total and your
RRSP contribution room will be $13,680.
Now a lot of people won't be able to contribute
that much to their RRSPs especially if they have
a young family or they are just starting out in their
career so let's say they can only contribute $6,000.
The room that is left,
the $7,680, would carry over next year.
Maybe next year you don't have to pay for
daycare or you get a raise and are able to
contribute a little more.
Or use it to offset huge capital gain,
like selling an investment property.
If you made any RRSP contributions,
that amount will decrease your available room.
This is important to remember because
if your employer offers an RRSP or
a pension plan matching program,
then your employer's contribution
will also reduce your available room.
And Unlike TFSA,
once you take out from your RRSP,
the room won’t reset.
Now you want to make sure you record every
single RRSP contribution because you don't want
to exceed your available room because if you do,
the penalties are severe.
If you exceed your RRSP contribution room,
you will be charged a 1% fee
every single month on this excess amount,
this equates to a 12% annual fee,
which is a painful pill to swallow.
Technically the government allows you to
contribute $2,000 above your
contribution room before you get penalized.
However, this wiggle room is meant to
protect you in case you make a mistake.
Note that this $2,000 amount cannot be
deducted from your taxable income,
so try hard not to get to that point.
Let's say I didn’t know the limit and
I added $12,000 to my RRSP after
I was already maxed out.
I won't pay any penalties
on the first $2,000 in excess.
I still have another $10,000 above my limit.
And so, I will be charged 1% or $100 every single
month until I withdraw that excess amount.
Now you probably don't want to
do all this complicated math yourself.
Don't worry
Thankfully CRA keeps track
of this information for you.
After the CRA processes your tax return,
it sends a Notice of Assessment,
which includes your next years' contribution limit.
This notice also shows your unused contribution room.
You can also call the CRA tax enquiries line.
Just be sure to have your
SIN and previous tax return ready.
Alternatively,
you can register for 'My Account' with CRA
to view your RRSP limit as well as track your refund,
make updates to your return and monitor payments.
Now if you want,
you could open multiple RRSP accounts with
different financial institutions if you want.
You can have one with TD,
one with wealth simple as long as
the total amount you've contributed to all of your
RRSP accounts cannot exceed your contribution limit.
Any growth you earn inside your
RRSP do not count as contributions.
Only the principle money you put into your
RRSP counts So if you've maxed out your RRSP
and then you make 5000 in profit on the investment,
those gains are tax-shelter unless
you take it out from your account.
Remember the benefit of investing in your RRSP is
your RRSP contributions allow you to reduce the
amount of taxes you pay right now and defer
these taxes for 20, 30 or even 40 years down the line.
When you have a high income,
and you are in a high tax bracket,
you can save a huge amount of money
by delaying these taxes until retirement,
when your income is lower and
your tax rate will also be lower.
With that mind set,
Now let's look at examples of
how you might use your RRSPs.
So for example,
if you did a lot of of over time or
you receive a huge bounus this year.
It’s great idea to contribute into your RRSP.
That also applies to people who earns base
salary and commission like the car industry.
You had a great year but you might forsee next
year you might take a hit on the car shortage.
So not a bad idea to put more in rrsp before
febuaray ends to offset your high income.
And take it back out when your income is low.
That applies to maternaity leave too.
Say Mary is preganet and she expects
her maternaity leave in Jan next year.
Because EI can only cover her 50% of her income.
Which means her income is low
and cashflow might be tight.
What she can do,
is put a lot in RRSP this year.
Get more in tax return.
Then if she needs the money
during maternaity leave,
she can take it back out.
And still she can gain from the tax difference
Government beneftis
Some Goverenemnt benefits are income related,
meaning once you pass a certain thereshold
like Child Care Benefit, or Old age security.
Those benefits will be clawed back.
So time to time,
we might recommend to put more in RRSP,
to lower down the net income.
Therefore, they get more governvement benefits
while able to save for the future.
Nowadays, the real estate market is hot.
When you sell an investment property,
50% of the gain is taxable.
And that easily can go up to 6 figures.
According to statstic Canada,
average canadain contribute $4000 to their rrsp only.
Which means there will be a lot of room left over.
so it’s the time to use those rrsp room to offset it.
And the list is on and on.
The essence of the rrsp is to
leverage the tax bracket difference.
So please talk to an accountant or financial advisor
to see if it makes sense to contribute more.
Alright, that’s pretty much it for Part I.
Thanks for watching guys and
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I'll see you guys for part two of RRSPs explained.