10 RRSP Strategies That Save You Tax
- If you earn below $45,000 taxable income contributing to an RSP is not a great strategy as it generates a refund of 22%. Explore the advantages of a TFSA where you pay no tax on withdrawals. You can contribute and accumulate savings and growth in your TFSA. Then withdraw from your TFSA to contribute to your RRSP in a HIGH tax year to create a higher tax savings and refund. The best part is that you can re contribute the amount you withdrew from your TFSA the following calendar year.
- If you earn higher taxable income of $130,000 an RSP might just be a great idea as each dollar contributed generates a refund of 47 percent. High Income earners should definitely contribute to an RSP. The works especially well if you have excellent investment income and capital gains.
- Withdraw (deregister) your money from your RSP in low tax years or low income years before retirement.
- Save and invest your tax refund in a TFSA or pay down one of your RRSP loans
- Convert RSP to RIF early then delay taking CPP to generate a return of of .7% per month or 8.4% for each year you delay applying. Delaying 5 years provides 42% higher CPP payments by age 70. You can also delay taking your OAS Old Age Security.
- Withdraw from your RIF early (delay taking CPP and OAS to reduce OAS claw backs later on)
- If a couple each has an RRSP they could RIF one early then income split
- Maximise RSP contributions and tax refunds when your young especially in high income years
- If your marginal tax rate is lower in retirement that it was when you were working then the RSP tax strategy is working
- Borrow to make an RRSP contribution if you're in the highest tax bracket
- Take 2 RRSP loans then pay1 off with your tax refunds
Borrowing to Contribute to a RRSP
Its not a good idea to borrow money to contribute to an RRSP unless:
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You’re in the tax bracket where you get a 35% to 45% tax refund
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You can afford to pay off the loan within 12 to 24 months
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You can afford to make an RRSP contribution from your annual cash flow.
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The following example may help you understand the costs benefits of borrowing to contribute to an RRSP:
Taxable Income $ 75,000
Ontario tax $15,735
After Tax Income $59,265
Average Tax Rate 20.98%
Marginal Tax Rate 31.48%
Marginal Tax Rate on Capital Gains 15.74%
Marginal Tax Rate on Eligible Dividends 8.29%
RRSP Contribution $13500 Note RSP contributions are after tax income
Cost of Borrowing 4.75% for 12 months = $13,500 x 4.75% = $351 with monthly payments of $1,154.31
Tax Refund Ontario $4,037
If you apply your tax refund to pay off the RRSP loan then the loan only costed you $9,463
Interest on the RSP loan is not tax deductible