As we near the cut-off for depositing to your RRSP for the 2020 tax season, let’s talk about what an RRSP actually is and how you can use it to maximize your savings.
What is an RRSP?
An RRSP something many people overcomplicate, but really it’s just a bank account with special rules. The rule is, when you deposit money, the bank will give you a tax deduction slip. When you take money out, the bank withholds some money for tax purposes. Basically, it is a tax deferral method.
Strategize to Maximize
There are some strategies you can use to maximize the savings from the RRSP. For example, depositing when you are in a higher tax bracket and deferring tax until you are in a lower tax bracket (aka retired), can save you a ton in tax!
Any contributions can also be carried forward to a future tax year. So, if you have the extra money to contribute this year, but know your income is going to increase… Then, you may want to take the deduction next year!
Don’t Over-Contribute!
Your RRSP room is calculated based on your income, so be sure to check how much room you have. Over contributing results in penalties and they can be quite large. For this reason, we recommend choosing one or two places to open RRSPs according to the types of investment decisions you wish to make. Having too many can make it difficult to keep track of how much you have already deposited and how much room you have.
Check out these two videos for more information on RRSPs! We go over the basics of what an RRSP is, and give some examples for how you can use them to your advantage! Remember to subscribe to our channel for weekly videos with more tax tips!
