Canadian RRSP's Help lower taxes
Registered Retirement Savings Plans (RRSP) are a great way to help you lower the taxes you have to pay. So why don�t Canadian taxpayers take full advantage of RRSP�s? Well it may be because the tax treatment of RRSP�s is confusing to many Canadians. However, when you demystify the Canadian tax law written in the income tax act and translate it in simple to understand terms, it seems many Canadian�s may be missing out on thousands of dollars in tax savings.
So how easy is it to use a Canadian Registered Retirement Savings Plan (RRSP) for lowering taxes? Well, it�s simple really, you just need to understand a few simple RRSP eligibility rules.
First off you need to be a Canadian resident in order to qualify for the Registered Retirement Savings Plan (RRSP) tax savings. For US residents with Canadian RRSPs there may be a number of tax implications to consider including ways to move RRSP to IRA. For more details
Contributions can be made at any time during the taxation year or within 60 days after the end of that year up to a stated contribution limit. For details on how this limit is calculated read the article entitled calculating your RRSP contribution limit
For Canadians who have RRSP room tot contribute every dollar you put into your RRSP will essentially lower the tax you have to pay at the end of the year. The actual amount of tax savings from your Registered Retirement Savings Plan (RRSP) will vary according to your personal marginal tax rate. For discussion purposes the Canadian Federal Tax Rates are detailed in the table below;
CANADIAN FEDERAL TAX RATES TAXABLE INCOME BASIC FEDERAL TAX MARGINAL RATE ON EXCESS 0 - $37,178 $0 + 15.50% 37,178 � 74,357 5,763 + 22.00% 74,357 � 120,887 13,942 + 26.00% 120,887 & over 26,040 + 29.00%
For a simple illustration of how this works assume Bob has annual income of $90,000, has a federal marginal tax rate of 26%.
Situation #1 Normally Bob would be need to pay $18,009 (13942+4067) in federal income taxes on $90,000 of income. The calculation is demonstrated in the above table.
Situation #2 In this situation let�s assume that Bob contributed $10,000 to his RRSP during the year. Bob would then be able to deduct $10,000 from his gross income which would leave him with tax savings as a result of his RRSP purchase of $2600 ($10,000x26%). This would bring his total tax bill down to $15,409 from $18,009.
As you can see it makes a lot of financial sense to contribute to an RRSP. This is especially so if you have extra income that is currently invested outside of an RRSP. Additionally, the money in the RRSP will grow tax free until you make a withdrawal by converting RRSP�s to RRIF�s, usually in retirement when you are at a much lower tax rate.
Using RRSP�s as a simple tax savings tool can prove to generate substaintial wealth for Canadians at all income levels. The decision now remains how much of net income should be put in retirement savings? Considering the favourable tax treatment that Canadian tax law allows the answer might be as much as possible, but as always you should check with your tax lawyer, accountant or tax preparer for details related to your specific situation.
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