Canadians who have a Registered Retirement Savings Plan (RRSP) are already well on their way to saving towards retirement. You may be putting aside cash on a monthly or even just annually to help you save towards those goals.
What’s more, your RRSP is likely invested in strong choices that you’ve discussed with your financial advisor. These are all great things! But you still may be missing out on the easiest way to save money with your RRSP.
Check that notice of assessment
When you receive your notice of assessment from the Canada Revenue Agency (CRA), do you just skim it over and toss it in your financial folder? Check again. At the bottom, you’ll notice that it includes your RRSP deduction limit.
Why on earth is there a deduction limit for your RRSP? Unlike the Tax-Free Savings Account (TFSA), this deduction limit serves a separate purpose. Whereas the TFSA just means this is how much tax-free cash you can put aside each year, with the RRSP, it’s different.
Instead, the RRSP deduction limit is the highest amount you can put in your RRSP, because that amount is taken off your income. That’s right; you are taxed on the amount you earned minus anything you contributed to your RRSP.
How does it work?
Let’s say you made $100,000 in 2022. You then contributed $20,000 to your RRSP. That means come tax time, the CRA will take that $20,000 off your $100,000, only taxing you on $80,000. This is a huge deal.
What Canadians should do, of course, is look at where they fall when it comes to their tax brackets. This is different depending on where you live in Canada. But if you’re able to take yourself down to a new tax bracket, it could save you thousands each year! And what’s more, it’s simply being put towards your retirement!
Take a look at the chart below for an example of Ontario.
| 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, if you made $100,000 in 2021, you would be taxed 26% federally and 11.16% provincially. But if you made $80,000, or took that $20,000 off your income, suddenly those come down to 20.5% and 9.15%!
It all adds up
So, how much could you save in this scenario? If you were to put $0 into your RRSP, the CRA would tax you around $23,028. But if you were to invest that $20,000, that drops all the way down to $16,273! That’s savings of $6,755!
Which, by the way, is just above your contribution room for your TFSA. So, now you could take that cash and invest it as well in your TFSA. Suddenly, you’ve invested $26,000 for the year towards your investment goals, both long and short term.
