Open an RRSP account to reduce the amount of taxes you pay in Canada and save for your first house (up to $75 000)

In Canada, the Registered Retirement Savings Plan (RRSP) is an essential financial tool designed to help individuals save for retirement while benefiting from tax advantages. Opening an RRSP account is not only a smart financial move but also an important step toward securing your future

6/26/2023

One of the primary reasons to open an RRSP account is the significant tax benefits it offers. Contributions made to an RRSP are tax-deductible, meaning you can reduce your taxable income by the amount you contribute. This can result in a lower tax bill, allowing you to keep more of your hard-earned money. How does this happen? I will show you an example and after this, you should be able to understand completely how to get $3000 to $5000 dollars extra per year in taxes back.

Let`s consider the case of a single person living in Alberta and making $75 000 per year. Using this online income tax calculator from Wealthsimple, the after-tax income is $56,082 and he will be paying $18,918 in taxes.

REMEMBER: Contributions made to an RRSP are tax-deductible, meaning you can reduce your taxable income by the amount you contribute

Now let`s say you want to pay less in taxes. If you are able to contribute $10 000 dollars in your Registered Retirement Savings Plan (RRSP), you can reduce your taxable income by $10 000.

Now instead of making $75,000 this year, it looks like you made only $65 000 (your taxable income has been reduced by the amount you contribute)

Using the same calculator, if you made only $65 000, you should have paid only $15,797 in taxes (not $18,918 that you paid when you made $75000)

When you file your taxes, that $10 000 contribution will help you save $2939 in taxes ($18 918 - $15 797 =$2939). You will receive a cheque of $2939 after filing your taxes.

The $10 000 contributed can be used to buy investments such as stocks, ETFs, and other kinds of investments(like options trading). The investments within an RRSP grow tax-free, allowing your savings to compound over time without the burden of annual tax obligations.

If you are planning to buy a house for the first time in Canada, money can be removed from the RRSP. The Canadian government introduced the Home Buyers' Plan (HBP), which allows first-time homebuyers to leverage their Registered Retirement Savings Plan (RRSP) for a down payment. Eligible individuals can withdraw up to $35,000 from their RRSPs, tax-free, to put towards the purchase of a qualifying home. Couples can each withdraw up to $35,000, resulting in a potential total withdrawal of $70,000.