An RRSP (Registered Retirement Savings Plan) remains one of the most popular options for retirement planning among Canadians. While it’s difficult to determine exactly how many people are using these plans, we know that Canadians by and large are investing fairly heavily in retirement. Recent data indicates that roughly 65% of households in the family are making contributions to retirement funds. And while some of this funding, particularly among young people, is going toward TFSAs (Tax-Free Savings Accounts), RRSP contributions are still prevalent.
If you want to maximize your tax savings and minimize your tax obligation, you ca make judicious use of RRSP.
RRSP reduces your taxable income and builds your retirement wealth
RRSPs have long been considered strong and reliable options for this purpose. It provides a way for individuals and spouses to put money toward retirement in a way that will grow wealth — and do so without piling on additional taxes. Our simple income tax calculator takes RRSP savings into account and show you the marginal tax benefit of RRSP contribution quickly. Gains in a retirement fund of this nature are not taxed as income. It should be noted, however, that they are still taxable and can lead to minor tax issues if you withdraw money. Aside from that, you can actually lower your general taxes in the contribution year as well by funneling personal income from a business into an RRSP.
Tax consequences of RRSP withdrawal
RRSP withdrawals are taxed as extra income for the year in which you make them, which naturally adds to your overall tax bill. In other words, if you choose to pull $1,500 out of your RRSP to cover a given need or expense, that $1,500 is tacked onto your personal income for the year, adding to your taxes accordingly. There are a few different ways to handle the process. A “gross” withdrawal of that amount, for instance, means that you’ll receive the $1,500 minus whatever taxes and fees apply. A “net” withdrawal means that you’ll receive the full $1,500, but the extra amount needed to cover taxes and fees will be withdrawn from the RRSP as well. In either case though, a portion of your withdrawal is going toward taxes you wouldn’t otherwise be paying.
We don’t mention this to discourage people from using RRSPs at all. In fact, along with the aforementioned TFSAs, they remain very sensible options for long-term savings. But there are indications that more people are tapping into retirement savings, both in general and as a specific result of financial needs brought about by the coronavirus pandemic. No one’s to say if this is a good or bad idea in broad terms, because each person’s situation is different. But it is important to understand the potential tax consequences of making withdrawals from a fund like an RRSP. This sort of withdrawal is still an option if needed, but it will result in a greater amount owed in taxes.
Penned exclusively for fastneasytax.com
by Joyce Bligh
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