So everyone knows when you put money into an RRSP you get money back. The question is, do we actually understand the basic principles of how the process works?
For the purpose of this discussion we’ll use a single person with an income, before taxes, of $60,000. For this person (no deductions for dependent children, or spouse) they will be paying a total of $11,056 to the Government in tax (CPP and EI are separate). That’s a lot of money!
What would happen if this same person earned one more dollar in 2011 ($60,001)? How does the tax situation work then? Well essentially this person would pay roughly 30 cents to the Government for earning that extra dollar (approx 30% tax rate). So what does this have to do with RRSP’s? Easy…
Let’s say our hypothetical person wanted to put $10,000 towards RRSP’s this year but had no idea what they would get back. So they came to us (or their accountant) for the answer … $2970. Essentially you are receiving a large portion of the tax back that you paid throughout the year. Therefore, to explain the full situation, if you put $10,000 into your RRSP’s the Government doesn’t tax you on the whole $60,000 anymore, they tax you on $50,000 ($60,000 – the $10,000 RRSP contribution) and you only owe the tax payable on $50,000 (or a total tax amount of $8,086)!
So what if you don’t have $10,000 to put into your RRSP, but you want the tax benefit? We can actually help you acquire an RRSP loan, and even set it up so you don’t have to make a payment until you receive your tax return (providing you submit your taxes on time). That way you can take advantage of the tax savings now and pay it back on a monthly basis throughout the year!
For more information, please ask.
Travis Strain, CFP
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