The Registered Retirement Savings Plan (RRSP) is one of the best ways to combat this downturn. And it comes down to investing. While it might seem strange to put more money into your RRSP if you want to end up with more cash in your pocket right away, that’s exactly what I’ll be doing this tax season.
Let me explain
There are many short- and long-term benefits to the RRSP. There’s the obvious part of saving for retirement. There’s the first-time home-buyers plan. And there is more, of course, but today I’m going to focus on the one part I’ll be using this tax season.
For every dollar you contribute into your RRSP, that dollar is then taken off your income tax return. Of course, that only applies up to your RRSP deduction limit. This means should you invest enough in your RRSP, you can take your income down to an entirely new tax bracket.
This is what I attempt to do every single tax season. I put cash aside every month that is automatically contributed into my RRSP, so the tax sting is far less. Then I’ll look at my income for the year and calculate how much more I need to contribute to bring me to a new tax bracket.
So, let’s look at an example.
Bringing you to a new bracket
Let’s say you live in British Columbia and make the average $67,000, according to the Government of British Columbia, as of February 2023. Now, if you didn’t contribute anything into your RRSP, you would end up paying about $11,141 in taxes for the year. Of course, in most cases this would come off your paycheque.
To bring it down to a new tax bracket, let’s look at what you’re charged by the government. First, there are federal taxes at 20.5%. Then there are your provincial taxes at 7.7%. To bring both down, you would need your income to be at $43,000, which is a huge investment of $24,000. If you could do that, your taxes come to 15% and 5.06% federally and provincially, respectively. Plus, you’ll only owe $4,808 in taxes!
Even just lowering your income to $50,000 would bring your federal tax to 15%. That means investing $17,000 for the year, and you would then just owe taxes at $6,383. Again, you’ve already likely had $11,141 taken off your income taxes by your employer. This means you would suddenly have a return of between $4,758 to $6,333!
Make it even more
Now, again, I don’t invest this all at once. I choose a dividend stock that I drip feed into over the year. If I was aiming for $17,000, that would mean a $1,416 investment each month, or about $708 off each paycheque. That’s certainly significant, but if you invest in a dividend stock, you can then use those funds to put towards your RRSP at the end of the year!
I would choose a bank stock right now, as the rates are great, and you can bring in high dividend yields. A great option is Toronto-Dominion Bank (TSX:TD). Its yield is at 4.97%, and it is trading at 9.47 times earnings. You can watch as shares and your RRSP rise higher and use those funds from the year to put towards your RRSP!
At the end of the day, you’ll have a larger RRSP, thanks to your contributions and investments. Furthermore, you’ll have money back from the government instead of paying them. And that’s cash you can use to your advantage, and even put towards next year’s RRSP limit.
