Well, we got the first month of 2019 under our belts which means that tax time is right around the corner. If you’re like me you hate having to hand over your hard earned cash in order to cover your taxes. In steps the RRSP.
Now many people will argue about what is better a TFSA or RRSP contribution and we will get to that in a later post* but for now
First of all, let’s take a little look at what our tax rates are. This chart is from our friends over at Taxtips.ca an amazing resource for all things tax in Canada. This chart is representing combined federal and British Columbia taxes, don’t get too wrapped up in the numbers. There’s an example below…
Let’s have a look at what a RRSP contribution will do for us.
Stephanie earned $82,000 in 2018 which puts her in the 31% tax bracket. However, due to some clerical errors, not enough tax was collected throughout the year and she is going to owe $300. Smart Steph realizes this before the RRSP deadline of March 1st and does some math. Which is really easy if you use an online calculator like this one on the TurboTax Intuit site. Really the math is quite simple.
To eliminate that $300 owing, Steph simply divides 300 by .31 (we know her tax bracket is 31% or .31) $300 / .31 = 967.74 Looks like Steph needs to contribute $967 and change. Awesome! Now being mostly Mustachian, Steph pulls that $1000 cash out of her emergency fund and saves $300 being lost to the government forever. In other words, Steph is getting an instant 31% return (or tax deferral) on that $1000. Probably the best result is that another $1000 is able to grow tax sheltered for years to come.
There are many other factors at play here such as having the money to invest in the first place and if the investment meets your financial goals etc.* I just want you to remember that if you don’t feel like paying your taxes, there is a way for you to get out of it that doesn’t result in a tax collector knocking on your door.
*You must consider not only your marginal tax rate in the year you make your RRSP contributions (i.e. this year) but also your expected marginal tax rate in the year you expect to make withdrawals. Everyone’s tax situation will be different and this post should not be taken as advice related to your personal situation.