Ah, tax time. For some it’s a burden, paying the government sucks. But at one point in our lives, we will be pulling a fast one and getting money back from the government. For some, this can come in the form of tax free investment option like a TFSA. You can learn, start contributing to it and earn investment capital tax free. Your write-offs for having children, going to school, or starting a business can also be tax deductible. But for most, the money we receive every March will come from contributions to our RRSPs, or “Registered Retirement Savings Plans”.

So What Is The RRSP

An RRSP is simply a registered government investment account. Whenever you put money in, the government knows. Whenever you take money out (try not to do this early) the government knows. This started way back in 1957, in an account that was once called a RRA, or Registered Retirement Annuity. Since then it has become an extremely popular way for Canadians to invest. Why? Well that’s the point of this article. If you don’t have an RRSP open yet, I’m sure after reading this you will be sprinting to your local bank. It’s an account that the large majority of Canadians are much better off having than not.

The Benefits Of An RRSP

An RRSP has many benefits. So much so that I’m not going to be able to explain every single one of them in this article. Instead, I’m going to go over some of the benefits that will apply to the large majority of Canadians. This way, I hit close to the bulls eye and help as many of you eager investors as possible. Lets start with quite possibly the most important benefit of an RRSP and why you are making a huge mistake not having one.

RRSPs Are Tax Deductible!

When you put money into an RRSP, the government has decided to allow you to deduct that off your income tax. What exactly does this mean? Well, it simply means any money you contributed to your RRSP is subtracted from your total income for the year. How does this benefit you? Say for example, and I am using very generic numbers here, you make $72,000 in a year. You fall into the 20.5% income tax bracket and must pay $14,760 to the government in income tax. However, lets say you were extremely frugal and managed to contribute the maximum to your RRSPS, which is 18% of your income, or in this case, $12,960. This contribution over the year is subtracted from your total income. $72,000 – $12,960 = $59,040 The problem here is, we’ve now paid $14,760 in income taxes on $59,040 in total taxable income. Ever watch the “That’s Too Much!” game on the Price Is Right? You should be shouting it right now. Theoretically if we were to stay in the same tax bracket, you should be paying only $12,103 on your income. Subtract the difference, and you have the total amount you’ve overpaid, and the amount you will receive back from the government. Now, like I said, the numbers get a little bit more complicated than this as you have different incomes taxable in different brackets. There are a lot of different provincial tax rates, which is why I chose to show you a bare bones federal tax rate just to give you the foundation of what exactly it means. I thought I would explain this in the simplest form possible as I see a lot of people who are generally confused as to what the term “tax deductible” means. Also, if you’ve worked enough or worked multiple jobs you have probably overpaid your CPP and EI to the point where you will receive some of that back. But that is an entirely separate entity.

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