Release the potential of your RRSP’s with these 5 easy tips.
1. Have your RRSP contributions deducted automatically
Monthly (or even biweekly) pre authorized payments can help minimize the pain of having to make a large contribution during tax season. In addition, you will get the benefit of tax deferred growth during the course of the whole year.
It is also important to consider the power of group RRSP’s. Some employers allow employees to deduct RRSP contributions from payroll before tax deductions are calculated. This reduces the tax that is deducted on each paycheque
2. Contribute more when you earn more
Due to the graduated tax system that operates in Canada, the more you earn the higher the tax rate your income is subject to. Because of this, when you are earning more you should consider maximizing your contributions to benefit from the tax deduction. Plan to withdraw in retirement when your income and tax rate and likely to be lower.
3. Spousal RRSP
A spousal RRSP is an RRSP that is opened by your spouse but allows for contributions by you with the benefit of the tax deduction bestowing to you. When the funds are withdrawn by your spouse they will pay the tax. They will pay less taxes on the withdrawn income than you saved on the deduction from the contribution (assuming you are the higher income earner). This unique income splitting strategy can save your household taxes before and after retirement.
4. RRSP Loan – borrow money to make money
If you have excess contribution room an RRSP loan is something to consider. You may want to make a larger contribution during the first 60 days of the year. With interest rates being very low right now you could pay minimal interest on the loan but end up with tax savings of up to 25%. You could then use your tax refund to repay some or all of the loan.
5. Using your RRSP for more than retirement
You can borrow funds from your RRSP to buy a qualifying home through the Home Buyers Plan or to pay for qualifying educational program through the Lifelong Learning Plan. You do not have to pay tax on these withdrawals as long as you repay the money to your RRSP according to a set schedule.