Valley First

Reduce your tax bill

Lowering your tax bill is easier than you think

Even a small RRSP* contribution can reduce the amount you owe. RRSPs are a great way to save for retirement because they allow you to delay paying taxes on contributions until you withdraw the money—typically when you’re retired and in a lower tax bracket. Unlike other savings vehicles like TFSAs*, contributing to an RRSP can reduce your taxes owing, or even result in a refund—and it doesn’t take as much as you think.

Let’s take a look at how much you can contribute and the impact your contribution will have come tax season.

The maximum amount you can contribute to an RRSP in any given year is determined by calculating the lesser of the following (you can find your exact contribution limit on your most recent Notice of Assessment from the CRA):

  1. 18% of your earned income from the previous year (including salary and rental income but not including investment income);
  2. The maximum contribution limit for the tax year ($24,930 for 2015); or
  3. The limit after deducting pension plan contributions.

But you don’t have to contribute the maximum amount to benefit from tax savings. In this example, you’ll see how even a small RRSP contribution can reduce the amount of taxes you owe:

Laura earned $60,000 last year and her RRSP contribution limit is $10,800. If she contributes the maximum amount, she could potentially reduce her taxes owing by $3,208. If she contributes half the maximum amount, or $5,400, she could reduce her taxes by $1,604. And if she contributes as little as $1,000, she could reduce the amount she owes by $297.**

If you’re like many people and you’re not able to make the maximum contribution in any given year, you can contribute a smaller amount and carry forward the difference indefinitely. This can be particularly helpful if you expect to be in a higher tax bracket in the future.

If you don’t have enough money saved to make even a small a contribution this year, consider an RRSP loan from your financial institution. Not only will you benefit from the immediate tax savings, but your money will grow tax deferred for longer, meaning down the road you’ll have more money saved for your retirement.

Not sure how much you should contribute? Ask your financial advisor and create a plan that works for you.

*Securities and securities related financial planning services are offered through Qtrade Advisor, a division of Qtrade Securities Inc., Member of the Canadian Investor Protection Fund. Mutual funds and securities related financial planning services are offered through Qtrade Asset Management Inc., Member MFDA.

**Calculations are approximate; actual amount may vary.


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