Top 5 Ways to Use an RRSP to Help You Save Taxes

Most know that there are some great reasons to open a Registered Retirement Savings Plan (RRSP) to save for your retirement. Many however, don’t know just to how to use it to save more taxes, now or in the future. Here are the top 5 ways to use an RRSP to save you taxes:

Make Tax Deductible Contributions

Yes, many know you can claim your RRSP contribution as a deduction on your tax return. This means your RRSP contribution reduces your net income and can put you in lower tax bracket – reducing the overall taxes you pay that year.

Even better, if you are in a lower tax bracket when you withdraw that money (e.g. when you retire or get laid off), you get to keep the difference between your higher tax rate when you contributed and the lower tax rate when you withdraw those funds.

Just make sure you have room in your RRSP contribution limit, and you contribute only to the maximum amount that will reduce your tax (i.e. don’t make a large contribution if you’re in a low tax bracket, e.g. if you’re not working the full year or maybe starting a business and making less money).

Maximize Tax-Free Compounding to Help Your Savings Grow Faster

You won’t pay any tax on investment earnings as long as they stay in your RRSP. This tax-free compounding allows your savings to grow faster, because you’re earning interest on the money that you would normally have to pay in taxes if this was not in an RRSP.

You can also get a bigger bang from your RRSP contribution if you put your tax refund back into your RRSP, so you can also defer the taxes on the earnings on that tax refund.

BE CAREFUL however, in selecting investments for your RRSP. Many ads on TV these days focus on lower management fees, but they don’t talk about the risks involved. Because the truth is, all these companies have to make their money, so there is always a “fee”. They just usually call it something else so they can promise “no fee” or “lower fee”. So, make sure your investment has the right balance of protection and fees (costs), so “the unexpected” and “the misunderstood” doesn’t drain your savings.

Convert your RRSP at retirement to receive regular payments

You are able to convert the money saved in your RRSP into a RRIF or annuity when your time comes to retire. You’ll pay tax on the regular payments you receive each year- but if you’re in a lower tax bracket in retirement, you’ll pay less tax.

Use the Spousal RRSP to reduce your combined tax, now and at retirement

Reduce your combined tax burden. If you are married and one spouse earns more money than the other, a spousal RRSP contribution can lower the tax paid by the spouse with the higher income (giving you a better tax deduction and maybe a bigger tax refund).

This can also help balance out your income at retirement, so you both pay less tax in the long run.

Borrow from your RRSP tax-free to buy your first home or pay for your education

You can borrow money from your RRSP without paying back the tax on the withdrawal, under certain conditions:

If you want to buy your first home (Home Buyer’s Plan) or pay for your education (Lifelong Learning Plan), you can take up to $35,000¹  (HBP) or $20,000 (LLP)³ respectively from your RRSP to fund it without paying tax on the withdrawals (providing that the money is paid back or claimed within the specified time1).

Note: An individual will be considered a first-time home buyer if you’ve not owned a home in the prior four-year period. As well, the 2019 budget changes to the HPB allows individuals to qualify as first-time buyers because of a breakdown of their marriage or common-law partnership².

After all, it’s not how much you earn,

but how much you get to keep,

that will help you live the life that you want.