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Contributing to an RRSP to Pay Less Tax: 4 Real-Life Cases

18 December 2018 by National Bank
RRSP to pay less tax

The Registered Retirement Savings Plan (RRSP) is over 60 years old but it's certainly not on the verge of retiring! Since it was introduced in Canada in 1957, it has come a long way. According to the latest data from Statistics Canada, nearly 6 million Canadians contributed to an RRSP in 2014, depositing no less than 38 billion dollars (or an average of $6,500 per contributor).

This popularity is simple to explain: it doesn't matter how old you are, contributing to an RRSP is one of the best strategies to pay less tax and have more money for yourself!

In a nutshell, the amounts invested in an RRSP allow to reduce your taxable income for the year for which you have contributed. You will only need to pay taxes on these amounts upon retirement.

And, since Canada has a progressive tax rates (higher income is more heavily taxed), contributing to an RRSP is a good way to reduce your taxable income during your working life (higher tax rates due to higher income) and to only pay tax when you withdraw these amounts, much later, and generally, at retirement (lower tax rates due to lower income).

In short, with an RRSP, you pay less tax today and you will pay less later!

How Much Can You Contribute to Your RRSP?

Every year you may contribute up to 18% of your income to an RRSP, or a maximum of $26,230 for 2018.

That said, your contribution room accumulates if not used. You could therefore reduce your taxable income by over $26,2320, and benefit from even greater tax savings. With such fiscal benefits, it may be even preferable to take out a loan to maximize your RRSP contributions, through an RRSP loan.

Until When Can You Contribute to Your RRSP?

You may contribute to your RRSP all year long, or within the first 60 days of the current year in order for the contribution to be eligible for the previous fiscal year. The RRSP contribution deadline for 2018, is March 1, 2019.

Pay less tax thanks to an RRSP, but how much less? Here are four real-life cases!

If retirement seems like a long way off to you, remember that an RRSP can also allow you to buy the most important asset you'll every own in life: a home. Indeed, the Home Buyer's Plan (HBP) allows you to pull out up to $35,000$ from you RRSP, and this, without any tax penalties. Would you rather go back to school? With the Lifelong Learning Plan (LLP), you could withdraw a maximum of $20,000 from your RRSP to finance your new degree!

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