The Registered Retirement Savings Plan (RRSP) is a huge benefit to Canadians across the country. It allows you to put cash aside to save towards retirement — all tax free until you take it out eventually.
However, there are benefits that you can gain every single year. And if you have the means, there is a goal you should aim for again and again.
Bring it down
The RRSP allows Canadians to bring down their taxes each and every year. Every dollar you contribute, that dollar is taken off your income by the Canada Revenue Agency (CRA). Take off enough, and you can enter an entirely new tax bracket!
So, pay close attention to your income and contributions. A goal investors should have is to bring their income tax down a tax bracket each and every year. Not only will it mean you’re paying less in taxes, but all that money simply goes towards your retirement!
A great option is to use your RRSP in combination with your Tax-Free Savings Account (TFSA). Set up contributions that you’re comfortable with every paycheque. Then, before tax time, see how far you’re off from entering another tax bracket. Once you identify that number, take some cash out of your TFSA and put it towards your RRSP contribution.
An example
Let’s say you make $100,000 per year and live in Ontario. If you didn’t pay any taxes, you would owe the government about $23,028 at tax time based on 2021 tax rates. Then let’s say you put aside $250 each paycheque towards your RRSP. That would mean each year, you would have $7,500 put towards your RRSP. That alone reduces your taxes to $20,220.
Now, the thing here is that this doesn’t put you in a new tax bracket. Here’s a breakdown of the taxes for Ontario and federally.
| Federal tax bracket | Federal tax rates | Ontario tax bracket | Ontario tax rates |
|---|---|---|---|
| $49,020 or less | 15.00% | $45,142 or less | 5.05% |
| $49,021 to $98,040 | 20.50% | $45,143 to $90,287 | 9.15% |
| $98,041 to $151,978 | 26.00% | $90,288 to $150,000 | 11.16% |
| $151,979 to $216,511 | 29.00% | $150,001 to $220,000 | 12.16% |
| More than $216,511 | 33.00% | More than $220,000 | 13.16%% |
As you can see, you’re still going to fall within the $90,288 and $150,000 tax bracket in Ontario, though you’re now down from the federal tax rate. If you then invested $250 into your TFSA each paycheque, you’d have another $7,500. To get to a new Ontario tax bracket, you’re off by just $2,212! So, you can take that out, put it into your RRSP, and you now owe $19,477. That’s reduce your taxes by a total of $3,551!
Bottom line
Motley Fool investors can now use this to invest in stocks or bonds or mutual funds that will see your funds grow through to retirement. For example, if you were to invest in a Big Six bank like Royal Bank of Canada. It offers a dividend yield of 4.06% as of writing. You could then reinvest that passive income, the $9,712 in your RRSP, and the remaining $5,288 in your TFSA. That alone would bring in an additional $609 on top of your annual savings!
