What is RRSP Season?
Why does it matter to you?
The RRSP season is in full swing, but what exactly is the RRSP deadline and why should you care about it?
Millions of Canadians are missing out on RRSP advantages
Two of the major registered savings accounts in Canada are Registered Retirement Savings Plans and Tax-Free Savings Accounts. However, according to a BMO poll, almost a third of Canadians don’t know the difference between the two. For the record, both accounts allow your investments to grow tax-free, but only RRSPs will bring you a tax refund.
Any amount you save in your RRSP (up to your annual contribution limit) will be deducted from your taxable income for that year and therefore effectively reduce your tax bill. For example, if you have a taxable income of $60,000 and save $6,000 in your RRSP, your taxable income would be reduced to $54,000. In Saskatchewan, the marginal tax rate for that income is 33%, so you would get a tax rebate of $1,980.
However, the CRA always gets you in the end. Once you retire and transfer your RRSP into a RRIF, all withdrawals are counted as taxable income.
This is why, according to an Angus Reid Forum poll, a whopping 39% of Canadians don’t see the point in investing in RRSPs, because they would eventually have to pay tax when they withdraw savings in retirement. This means that millions of Canadians are missing out on a highly efficient way of saving for retirement.
While it’s true that you will be taxed when you withdraw money on retirement, that’s only one part of the story.
When RRSPs should be a no-brainer
The lowest marginal tax rate in Saskatchewan is 25.5%, which you pay if your taxable income is below $45,225. Once you earn over $47,630, your marginal rate jumps to 33%: a big difference. The more you earn, the higher your marginal tax rate becomes.
The chances are that, when you retire, you will be in a much lower tax bracket than when you were working. Therefore, you can get a considerable tax return by investing in RRSPs, which you can then invest in next year’s RRSPs and thus grow your retirement savings even faster.
When you retire, the amount you’ll pay in tax could be as low as 25.5%, so you’ll have saved a significant amount in tax, depending on your working tax bracket.
The other main advantage is that your savings grow tax-free. Within an RRSP, you can hold all manner of investments, such as stocks, mutual funds, bonds, GICs and ETFs.
Interest, capital gains and dividends are all tax-free. This means you get to benefit far more from compound interest and your savings grow much faster than in a non-registered account.
The savings by numbers
The table below shows the kind of tax return you might expect* by saving in an RRSP, when within a certain tax bracket, using a presumed savings rate of 10% of income:
|Taxable Income||Tax Rate||Savings Amount||Tax Refund|
* These amounts are approximate: consult with your accountant for exact figures.
The lowest tax bracket brings nominal returns and usually wouldn’t be worth considering, given that you’ll pay the same tax rate when you retire.
However, once you jump up to higher marginal tax rates, the refunds can be considerable and would make a big difference to your retirement savings.