RRSP Strategies That Will 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. Then withdraw from your TFSA in a HIGH tax year to create a higher tax savings. 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
- 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
- Early RIF withdrawals can potentially reduce OAS claw backs later on
- If a couple each has an RRSP they could RIF one early then income split
- Max out RSP contribution then out then just pay the tax when you retire
- 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
Borrowing to Contribute to a RRSP
Its not a good idea to borrow money to contribute to an RRSP unless:
You’re in the tax bracket where you get a 35% to 45% tax refund
You can afford to pay off the loan within 12 to 24 months
You can afford to make an RRSP contribution from your annual cash flow.
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