Any other freelance artists feel like tax season casts you as the character that dies first in every horror movie? No matter which path you take: shadowy woods, decrepit basement, faulty tanning bed (Final Destination ruined me), you’re bound to meet an imminent death that comes in the form of a crippling tax debt.
Now, of course, as contract workers, you’ve lived a blissful, ostensibly ‘tax-free’ year while benefiting off of basic healthcare, libraries, roads, employment insurance and all other things our tax dollars go towards. So, this miniature financial suicide in April doesn’t come as a shock (though hurts all the same). Luckily for us, there is a little lifeline that functions as a get out of jail 18% free card, and it is called the RRSP.
An RRSP is an investment account. Not an investment. Think of it as a bucket you can fill with different investment products. It is basically a proactive savings account registered with the federal government where you can allocate money into stocks, bonds, ETFs, mutual funds, GICs (guaranteed investment certificate – explanation reserved for another article), bonds and cash. This is a lot of gibberish to say that RRSPs are an opportunity to make money on your money without paying taxes. This has a name: tax-sheltered compounding (don’t fall asleep on me yet). This dull term means that your money grows (compounds) without being taxed (sheltered).
Where does one open an RRSP?
Pretty much any financial institution. The most plausible spot to go would be your local bank or an online brokerage. Your bank will most likely set you up with mutual funds that follow a real ‘set it and forget it’ approach. For my type-A readers (*waves at my editor*), discount or full service brokerages allow the opportunity for a more hands-on approach. This option offers a variety of investment products and endless trading ability (you can also go with a ‘set it and forget it’ approach here too). Many union members of any profession, along with their extended benefits, may also have a professionally managed RRSP.
3 Types of RRSPs:
- Individual: quite self-explanatory, this RRSP is for the individual.
- Group: contribute to an RRSP through your employer where the RRSPs of all employees are held at the same financial institution. Contributions are typically automatically deducted from your pay and the real fairy god-boss may match or add to your yearly contributions. The range of investment options is usually limited depending on where the group RRSP is held.
- Spousal: honestly, I haven’t got the energy. This one is complex and my bitter single existence prevents me from caring all too much so, you can read about it here if you’re a ‘split everything with your partner’ kind of person.
Note: You can have multiple RRSP accounts with different institutions. Just be sure the sum of contributions does not exceed your total limit (stated on your annual NOA).
Since the whole idea of the RRSP is to not so subtly encourage citizens to save for retirement, there can be tax consequences for early withdrawals. When you withdraw money you must declare the full amount withdrawn as income that year (and as us freelancers know, that comes with a sizable tax bill).
There are 2 programs that let you temporarily withdraw money without penalty:
#1 Home Buyers Plan (HBP)
- PRO: For first time homebuyers! The CRA allows you to withdraw up to $25,000 tax-free to put towards a down payment.
- CON: You have 15 years to repay these funds and repayment starts the second year after you make the withdrawal.
#2 Lifelong Learning Plan (LLP)
- PRO: For adults heading back to school! The CRA allows you to withdraw up to $10,000 tax-free per calendar year (subject to max $20,000 total over 4 years) to finance full-time education for you or your spouse.
- CON: You have 10 years to repay these funds and repayment starts in the 5th year after your first LLP withdrawal.
My PTSD from an endless onslaught of student loan repayments would lead me to recommend taking this money out of a TFSA or regular savings account as opposed to an RRSP, but, to each her own. (As we know, I have no credentials with which to advise on this).
Unfortunately, (mostly for me), this is not my last article on tax content. I will continue diving into the depths of government websites and seemingly random numerical figures to deliver the content my fellow finance novices need. Hopefully the titular allusion to an Aretha Franklin bop and my attempt at chill girl language have made this, at the very least, bearable. Up next? All the hot gossip on TFSAs…
I promise, this dark period will be over soon.
Click this link, if you’re so inclined, to subscribe for your weekly finance updates! (But please do, I’m newish here, it will help my rep)