The last day to file your 2021 income tax is April 30. After fighting high inflation, a high tax bill is not quite what you are looking for. So you’d better get number-crunching, as it’s time you do your tax planning before March 1. The Canada Revenue Agency (CRA) gives you a small window to save tax by investing in a Registered Retirement Savings Plan (RRSP). For the 2021 tax year, you can make RRSP contributions till March 1, 2022.
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RRSP tax benefit
You can invest 18% of your 2021 income up to a maximum of $27,830 in an RRSP and deduct this amount from your taxable income. Once you invest in an RRSP, your investment will grow tax-free, but any withdrawal will be taxable. Moreover, the tax will be deducted at the source for any withdrawals before age 71.
Who should invest in RRSP?
Looking at this condition, you might wonder if it is a good decision to invest in RRSP to save tax. I will explain the math. The tax amount you pay is gone forever. Generally, people who fall under the high tax bracket invest in an RRSP to reduce their tax bucket. And they mostly invest the surplus income they have and would not need for the long term.
Let’s take an example. Joey’s total taxable income for 2021 is $182,000. As per the federal tax bracket, $30,022 ($182,000 – $151,978) of his income will be taxed at 29%, which comes to $8,706. If Joey pays this amount as tax, he gets no special benefit. If he invests $30,022 in RRSP, he will save $8,706 in federal taxes in the present and enjoy investment returns in the long term. When he retires and has no active income, he can withdraw small sums of money, putting him in the low tax bracket.
Two TSX stocks for your RRSP portfolio
Now that you have arrived at an amount you want to invest in the RRSP, the next step is to determine which stocks to buy with this amount. You don’t want your hard-earned money to go negative 20 years from now. When choosing RRSP investments, look for stocks that will be there for the long term. It should be a business that is there today and will be there when you retire. I have identified two stocks to consider for your RRSP portfolio.
Descartes Systems
Founded in 1981, Descartes Systems (TSX: DSG)(NASDAQ: DSGX) is in the business of logistics and supply chain management. Trade is as old as human civilization. With time, trade became sophisticated, and companies like Descartes used technology to optimize the supply chain and make logistics cheap. Globalization and e-commerce are secular trends that will keep Descartes Systems in business for years to come.
Descartes Systems is a stable growth stock that has surged at an average annual rate of 20% in the last eight years. If you invested $10,000 in February 2014, it would now be worth $50,000. The company’s business model will keep the growth running for decades to come, making it an ideal stock for your RRSP.
Toronto-Dominion Bank
Like trade, banking is another sector that has been here for over a century. Over the years, banking has evolved significantly, and it now has several branches of operations, from loans to wealth management. Toronto-Dominion Bank (TSX: TD)(NYSE: TD) is among the Big Six banks in Canada with significant exposure to the United States. Founded in 1955, TD bank stock has been trading on the stock exchange for over three decades and all this while it is in a long-term uptrend. Unlike Descartes, TD Bank’s stock surged 117% in the last eight years, but it was because TD Bank paid dividends.
The bank increased dividends at an average annual rate of 12% in the last five years and has been paying regular quarterly dividends for a long time. Its rich history and sturdy business model make it a perfect choice for RRSP.
