When you contribute to an RRSP, that money is tax exempt for as long as you keep it in the plan and, even better, your contributions will reduce your overall tax burden each year.

When you contribute to an RRSP, that money is tax exempt for as long as you keep it in the plan and, even better, your contributions will reduce your overall tax burden each year.

Why the RRSP May Be Our Most Important Tax Planning Tool

It’s more than just a retirement savings account

By Laura Wierzbicki

Most people know the Registered Retirement Savings Plan (RRSP) as the must-use retirement savings account. But did you know that the RRSP is a powerful tax planning tool, too? With the February deadline for RRSP contributions fast approaching, now is a good time to look at the RRSP from a tax planning perspective.

When you contribute to an RRSP, that money is tax exempt for as long as you keep it in the plan and, even better, your contributions will reduce your overall tax burden each year. Individuals are taxed on their net income, which is equal to the person’s total income minus certain deductions, including a deduction for contributions made to an RRSP. That can result in significant tax savings.

For instance, a single person living in BC, who has a total income of $120,000 with no deductions, will pay combined federal and provincial tax of $29,014. If they contribute the most they can to their account, which in this case is 18 per cent of their earnings or $21,600 (for people making above $150,000, the max is $27,830 for 2021) then the person’s net income will be reduced from $120,000 to $98,400 and the tax owing would be $20,693. The RRSP contribution has reduced their tax owing by $8,321.

Here are some examples of tax savings for maximum RRSP contribution at higher levels of income:

Examples of tax savings for maximum RRSP contribution at higher levels of income.

Depending on your tax rate when you contribute and, later, withdraw, it can be a good idea to put your RRSP tax refund into a Tax-Free Savings Account (TFSA), in part because TFSAs are more flexible than RRSPs. You can save up to $6,000 tax-free in a TFSA each year and withdrawals are also tax-free. So, if you need quick money for an emergency, larger purchase or tax free retirement income, taking it from a TFSA will not trigger a tax hit but taking it from your RRSP will.

It’s important to know that an RRSP is more than a place to put your retirement dollars – it can reduce how much you hand over to the government, too. It’s always a good strategy to get your RRSP and TFSA working together to not only fund your retirement goals but also as effective tax-planning tools.

If you are unsure which account type is right for you, please reach out for a complementary review of your current financial plan.

If retirement is on your mind, please join us for our upcoming webinar on Feb. 24: “Retirement for today’s changing world: Exposing the top 5 myths in retirement planning.”

Laura’s advice comes with 10 years’ experience in financial services. She offers comprehensive, fully customizable financial strategies and solutions, working one-on-one with business owners, retirees, families, and individuals focused on building their net worth. Don’t hesitate to reach out for a holistic approach to financial planning, investment solutions, and insurance planning.

Laura Wierzbicki  BBA, Senior Investment Consultant

Financial planning