Unlike regular savings plans, the Canada Revenue Agency (CRA) provides tax advantages for those who have registered savings plans. By contributing money each year, you can reduce your tax bill—and in some cases, you may even receive government contributions.
Here are three types of registered plans to get to know.
The Registered Retirement Savings Plan (RRSP) was created by the Canadian government to help Canadians save for retirement. By contributing to an RRSP, your taxable income will be reduced, and your RRSP investment(s) will grow tax-deferred. This means you won’t be taxed on the growth you may see within your investment(s) until you make withdrawals.
If possible, wait until after you are retired to make withdrawals from your RRSP. Once you are retired, you may find yourself in a lower tax bracket than when you were working, so any taxes you need to pay on withdrawals will be lower.
Routinely make sure any automatic payments are adjusted so that you don’t exceed your RRSP contribution limit. Your annual contribution limit is listed on your CRA “My Account” service and your Notice of Assessment, or you can ask your tax specialist for clarification.
The Tax-Free Savings Account (TFSA) can hold almost any type of investment, making this kind of registered account superior to a general savings or chequing account. Here, your money can grow tax-free depending on the investment vehicle you choose, and you can make contributions and withdrawals at any time without worrying about tax implications.
Put any of your extra money into your TFSA when you have reached your RRSP contribution limit. You can use what you have saved in your TFSA to help cover unforeseen expenses, including taxes owing.
Deposit tax refunds into your TFSA so you are not tempted to spend them immediately.
The Registered Education Savings Plan (RESP) helps you save money for your child’s post-secondary education up to (and including) the year they turn 17. One of the advantages of this plan is that it will generate government contributions depending on what you contribute each year. For example, the maximum annual deposit is $2,500 and this would be eligible for a $500 education grant.
An RESP is great for taxes because the grant and growth portion is taxed to the student as long as they attend a post-secondary program. In this case, they would be taxed at a lower rate (if any).
We have just one: Get started as early as possible.
There are rules and limits not outlined above, and each financial situation may call for a different solution. Work with us on your tax plan to reduce your taxes owing and make your taxes more manageable in the long run.
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