Before we begin, is it just me or do you also hear a clip of Aretha Franklin’s RESPECT every time you hear the word RRSP? …
Regardless of whether you find this topic fascinating or dull, knowing your options when it comes to Registered Retirement Savings Plan (RRSP) can really be quite helpful!
1. FIRST TIME HOME BUYER PLAN:
A lot of people already know about this so I’ll keep it quite brief. There are two important points to touch base on:
(A) If you already have a big chunk of your down payment saved up, you can deposit those savings into an RRSP for the tax rebate and then withdraw the funds again using the FTHB program.
To go this route, keep in mind that:
- You can’t be in a rush to buy because once deposited, the funds need to sit in your RRSP for 90 days before they can be withdrawn.
- You can withdraw up to $25,000 PER PERSON from your RRSP’s.
- You will need to pay back withdrawn funds over a 15-year repayment plan (to avoid any tax implications)
(B) If you just bought your first home this last year, you can claim $5,000 of your down payment on your tax return and, if you and your home are eligible, get back a tax rebate of $750.
- You can choose to split this rebate with someone if you didn’t buy your first home alone as long as your credit doesn’t exceed that $5,000. In other words, there’s a max $750 rebate allowed for each home.
2. HOW DO RRSP’s ACTUALLY WORK?
We all know the gist of what RRSP’s are for but do you really, really understand? My wonderful Accountant colleague, Jade Palamarek, CPA, CA, has written a summary for February’s newsletter to help you decide if it’s something you want to focus on this tax season:
The basic concept is to invest in RRSP’s at a higher income tax bracket and then withdraw them at a lower bracket. This effectively generates a rate of return on the tax savings and what I like to call “the bracket game’.
- If you are a single person and have a 2018 T4 income of $105,000, you are in the third tax bracket, paying a combined marginal rate of 36% federally and an effective rate of 24%.
- To drop your income to the next bracket you would need a RRSP contribution of $11,792 which would drop your taxable income to $93,208 where the marginal rate is 30.5%.
- In the current year, that generates tax savings of $4,245 (36% of your investment).
- We do need to be mindful that that RRSP deducted today will be taxed in the future. Let’s say you withdraw that RRSP when your income is $15,000 per year in retirement. The tax that you will pay assuming all things remain constant would be $2,077 at most at a rate of 21.6%.
- On that one RRSP contribution you walked away with savings of $2,168 even if the RRSP generates a nil rate of return.
As a word of caution, RRSP’s are a case by case basis and this information should be vetted for your personal situation with your accountant and financial planner.
If you’d like to know more or are just in need of a great Accountant, Jade works with Herbert & Associates CPAS’s and can be contacted at 780-439-9328 or firstname.lastname@example.org.
3. YOUR TAX REFUND ISN’T NECESSARILY FREE MONEY:
Lastly, once you get your tax refund, you might be tempted to use it to escape to a non-40-below continent. Before you do, keep in mind that your tax refund isn’t fully “free” money.
Like Jade mentioned above, the RRSP program only defers the tax you pay on money until (in theory) you’re making less money and ready to pull RRSP’s to supplement income. At that time, you shouldn’t need to pay the amount of taxes you originally would have but you’ll still need to pay some sort of tax.
SUGGESTION: Consider re-investing that tax refund! Perhaps pay down some credit cards, invest into your TFSA, add to your down payment, or pay a nice lump sum payment on your mortgage Principal.
If you’ve got room and I’ve tempted you to go invest in some RRSPs, keep in mind that the deadline for 2018 contributions is fast approaching — March 1, 2019!
Also, there is so, so, so much more to know about RRSP’s and investing than I can ever hope to fully understand or explain: withholding taxes, deferring tax deductions, and the like If you’re in need of an Accountant to help with tax time or a Financial Planner to help figure out if you should invest in RRSP’s, a TFSA, or something else entirely, let me know and I’d be happy to refer you to one of our tested, proven, and true referral partners!
If you have questions about renewing/refinancing an existing mortgage OR qualifying for a new mortgage, please don’t hesitate in contacting me at 780-863-0700 or email@example.com.
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