There are many benefits to the Registered Retirement Savings Plan (RRSP). In fact, there are almost too many to name! But there is one hack (if you can even call it that) that could save you thousands. In fact, it could even create money if done right! So, let’s look at this hack and how to use it.
Do your taxes
First and foremost, if you’re going to achieve this hack, then the first step is to simply do your taxes. Once done, hopefully, you’ll receive a tax refund. While it might take a month or so, once it’s there, you’re going to want to put it straight into your RRSP.
I know, I know. There are many of us that want that tax refund for other purposes. Suddenly, you have thousands of dollars, and that’s something many of us could use right now — especially with inflation and interest rates the way they are.
However, I would urge you to consider putting it into your RRSP. That is, unless you have high-interest loans or debts that need paying. But if you don’t, here is how you can make this RRSP hack work for you.
The benefits
There are several strong benefits to contributing your tax refund into your RRSP. First off, by contributing to your RRSP, you won’t pay income tax on the money you contribute until you withdraw it in retirement. This allows your investments to grow even faster, reinvesting along the way. This alone will provide you with far more retirement savings.
However, all that contribution can be deducted from next year’s taxes as well! This can be hugely beneficial. The amount you contribute will reduce your taxable income and could potentially result in an even larger tax refund next year.
Depending on your province or territory’s tax brackets, your contribution could bring you down into a lower tax bracket. A lower bracket would equal a larger refund from the amount you paid in taxes! But there’s an even bigger long-term benefit to consider.
Lower taxes in retirement
If you expect to be in a lower tax bracket in retirement compared to your current bracket, contributing your refund to your RRSP can be particularly advantageous. It will deduct taxes at your higher tax rate now and potentially pay taxes at a lower rate when you withdraw the funds in retirement.
Furthermore, if you anticipate having a higher-than-usual income in one particular year, such as through a windfall, contributing these larger amounts can bring down your taxable income further. This can lower your tax liability, allowing you to reinvest that tax refund instead of paying the government.
Create even more
Once in your RRSP, I would certainly consider at these rates investing in a Guaranteed Investment Certificate (GIC). From there, consider dividend exchange-traded funds (ETF) that you can use to reinvest income.
One great option is Vanguard FTSE Canadian High Dividend Yield Index ETF (TSX:VDY). This ETF focuses on exposure to Canadian dividend-paying companies, those that have paid out consistently over the decades. The focus is, of course, on dividends, with a current yield of 4.61%! So, you will continue to create income that can be reinvested right back into your retirement.
Consider this hack before spending your tax refund this year!
