To be entirely transparent, I have been dreading writing this article. Making the phrase “tax-advantaged retirement savings” trendy is like trying to simultaneously make wedge sneakers, Kanye shutter shades and puka shell necklaces cool again. (I am using the term cool very loosely here).
But, as you know, I am an altruist and giver and assumed a weeks worth of research to make this investment information digestible.
Plus, an RRSP will save you money on your upcoming 2020 taxes – money that I know all us living-off-the-government-in-quarantine-time-CERB-people are going to need. Yes, these payments are considered income. And no, Biscuit Feet (using my friend’s nickname to maintain anonymity), skipping town is not the answer.
So listen up Canadians. I’ll make this short and sweet.
RRSP is an acronym for “registered retirement savings plan”. Before living out the relatively fictitious dramatics of stock trading, I recommend to my fellow novices to profit from the tax-advantaged accounts offered by the Canadian government. An RRSP is basically the government’s way of shoving its people into financial responsibility. They motivate retirement savings by offering a tax break on the amount of money you put towards, you guessed it, retirement savings.
Let’s say you make $60,000 a year.
You decide to put the maximum allowable into your RRSP: $10,800.
When tax day comes around, the CRA will treat you as if you’ve only made $49,200.
(Also! sometimes your employer will match your RRSP contributions so check with your employer today *TV ad jingle* ).
Now, of course, this is a gift from the government, so it comes with a million little convoluted and mind-numbingly boring strings attached. One of which is called the contribution limit. A contribution limit is the maximum amount a taxpayer is able to deposit into an RRSP annually. This limit is either:
- 18% of your annual income or
- a maximum amount (for 2020 that is $27,230)
Whichever number is smaller is your limit. However (fun loophole), if you don’t contribute your maximum, or miss a few years, all unused room carries forward so you can use it in the future! Tax breaks for years to come!!
Another attached string from the aforementioned strings-attached is that an RRSP is tax-deferred. Not tax-free. This means you will eventually have to pay taxes when you draw on your retirement savings years down the line. However, because you are only expected to do so at retirement, your income will theoretically be less than it is now and thus, your tax rate, lower.
So, who can have an RRSP?
- Anyone with valid social insurance number,
- Who has earned income,
- And has filed a tax return.
- And is not yet 72…
You can only contribute to an RRSP until the end of the year you turn 71. Feels very Madame Zeroni when she curses Stanley Yelnat’s family in the Shia LaBeouf classic Holes. If you haven’t understood this reference…well, I apologize for your empty childhood.
In any case, when you invest in an RRSP you are investing towards a better quality of life for your future self. And if you’re anything like me, I’d imagine my 72 year-old being to be quite the demanding bitch, so take care of her now.
And if you don’t care about your geriatric self (rude), then at least think of your more imminent tax season self (you’ve got 5 months, people).
This is quite critical given that 98% of you did not stow away a minimum 15% of your CERB payments…I would never be so crass as to name names but, Biscuit Feet, you know who you are.
And if you too, sweet reader, are a version of Biscuit Feet, this is in fact a massive compliment. (She is the smartest woman I know aside from suggesting that fleeing the country is a suitable way to avoid fiscal responsibility. Which is also considered tax evasion. But in her words, that is neither here nor there). All this to say financial knowledge and real world wit are not associated, in fact, those with too intricate financial knowledge have a tendency to lack real world wit entirely (shh don’t tell my boss).
In the interest of keeping these short and manageable and hoping you have actually read through to the end, stay tuned forHow RRSPs Work Part 2. (I’ll try to think of a more catchy title between now and then). Double the tax articles, double the fun?!
At the very least, it will spare you a stress-induced chin pimple or two come April 2021. Until next week…
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