The Paris Independent
21
February 17, 2024
F I N A N C I A L M AT T E R S RRSP tax deductions: Using your RRSP as a tax-planning tool Use your RRSP as a taxplanning tool, they are more than just a retirement savings account.
Common Cents with Jacob Gaudet
Many people consider the Registered Retirement Savings Plan (RRSP) to be a must-have when it comes to saving for retirement: almost six million Canadians contribute to one each year. But did you know that the RRSP is also a powerful tax-planning tool? It pays to know about the RRSP tax deductions that you could use. When you contribute to an RRSP, any growth, such as through interest and dividends, is tax exempt for as long as you keep it in the plan. However, another big advantage is that your contributions lead to RRSP tax deductions, which will lower your overall tax burden in each year you contribute. How does an RRSP tax deduction work? Canadians are taxed on their net income, which is equal to their total income minus certain deductions, including RRSP tax deductions. These can result in significant tax savings.
Let’s look at an example: a single low income, and therefore paying a person living in Ontario, with a total low rate of income tax, an RRSP may income of $120,000 and no not be the best option for you. deductions (including RRSP tax deductions), would pay combined Contributing to an RRSP makes the federal and provincial tax of $28,551. most sense from a tax-saving If they made the maximum allowable perspective if your tax bracket when contribution to their RRSP, this contributing is significantly higher would be 18% of their earnings, or than you expect it to be when you $21,600 (for people earning over retire. If you have an average-to$175,333, the maximum contribution significant income, making the is $31,560 for 2024). maximum contribution of 18% will allow you to receive the biggest tax Their net income, therefore, would be refund possible, while saving a large reduced from $120,000 to $98,400, amount for your retirement. and the tax owing would be $20,527, How much tax can I save with instead of $28,551. This RRSP tax an RRSP? deduction would mean they would Here are some examples of tax pay $8,024 less in tax for that year. savings for maximum RRSP How much RRSP should contributions, at various levels of I contribute? income: This will really depend on your Breaking down the income and other personal financial continued on page 22 circumstances. If you’re on a fairly
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