It’s that time of year again when we all start to think about taxes. How much money did I make this year? How much tax do I have to pay? Will I ever be able to afford to retire?
The most popular savings options for Canadians is the Registered Retirement Savings Plan (RRSP). This plan allows for one to receive a tax deduction equal to the amount of the contribution.
For example, a $20,000.00 contribution to your RRSP account will allow for a $20,000 deduction from the total income calculated on your tax return.
The concept is that you will be making less money when you retire and therefore will choose to pay the tax on the contribution when you collapse your RRSP in retirement, instead of paying the tax now at a presumably higher tax bracket.
The CRA adjusts the contribution limit of the RRSP annually. The 2010 contribution limit is $22,000. In order to ‘earn’ room to contribute to your RRSP you must be earning an income.
If you earned $50,000 last year, the government will multiply your prior year earned income by 18% to determine your contribution room. $50,000 x 18%= $9,000.00. Any unused room can be carried forward and used in future tax years.
The CRA considers earned income to include employment income, self-employed income, rental income, taxable support payments, CPP or provincial disability income, etc.
Dividend and interest income do not count as earned income and therefore do not contribute to your earned income, unless they are an active part of your business. This is especially important for shareholders who want to contribute to their RRSP but pay themselves with a dividend and not a salary each year.
Another option to reduce taxes using your RRSP is to contribute to your spouse or common-law partners RRSP account. However, keep in mind that this will reduce YOUR deduction limit.
RRSP’s are a flexible way to save for retirement, but they may not be for everyone. For instance, if you know that in the near future you will need a larger some of cash to invest in a business, you may want to stay more liquid and decide to invest less in your RRSP this year. As well, if you are already in a low tax rate, you may decide to wait until you are in a higher bracket to begin deferring any taxes.
The important idea to take away from this is that RRSPs can be a beneficial and structured way to plan for your retirement, but they are not for everyone. There is still a month left to make a contribution for your 2010 tax return (March 1, 2011). So please take the time to consider your current cash and retirement needs to decide if the RRSP is a good retirement strategy for you.
No comments:
Post a Comment