Things you know if you know RRSPs
Callum Sutherland - Nov 08, 2021
The RRSP is not the investment, it is what holds the investment and allows for the tax deferral. When you take the money out of the RRSP, you are not penalized, you are paying tax on that income and hopefully growth for the first time.
Things you know if you know RRSPs:
1. The 2021 contribution limit is $27,830, Are you wondering how is this calculated?
As an example, if you earned $60,000 in 2019, your RRSP deduction limit is 18% x $60,000=$10,800. This is less than the maximum deduction limit. If you earned $180,000 your deduction limit would be capped at the max limit of $27,230 as it's less than 18% of your income ($32,400).
2. The RRSP is not the investment, it is what holds the investment and allows for the tax deferral. When you take the money out of the RRSP, your are not penalized, you are paying tax on that income and hopefully growth for the first time. For example, if you invest $10,000 in a Balanced Mutual Fund in an RRSP and your income was $90000, you will pay income tax on $80,000. When you withdraw that $10,000, it will be added to your income and you will pay tax on that income for the first time.
3. There are opportunities to use money that is in the RRSP now. You can use it for the first time homebuyers plan and for the Life long learning plan
4. You don't have to wait until age 71 to start withdrawing money from your RRSP.
5. With a spousal RRSP, Canadian couples have the added advantage of income splitting: If there’s a big income disparity, the higher-earning spouse can contribute tax-free money to an RRSP in their partner’s name while claiming the contribution as a deduction on their own tax return.
An RRSP is a great tax savings tool if you are likely to be making less income later in life. The earlier you start investing the better off you will be. Make your contributions be automatic and increase over time. For example, contribute a certain amount over time(takes advantage of dollar-cost averaging) and have the amount increase a certain percentage each year. Don't wait until the RRSP deadline to contribute, do it now.