RRSP pros and cons
RRSP PROs and CONs
Are you looking to build your wealth by contributing to your retirement savings? RRSP contributions are a great option for saving for your retirement. However, there might some drawbacks/lost opportunities that might make TFSA accounts a better option for you. To help you with your retirement savings, let’s look at RRSP pros and cons:
What are some of the benefits of RRSP Contributions?
Have you taken advantage of your RSP room in the past? Don’t worry the good news is that RRSP contribution limits for Canadians continue to increase every year. Your allowable contribution is 18% of your income from the previous year to a maximum of $27,230 for 2020.
Possible Tax Refunds:
Y). This is what makes RSP’s so attractive is you are able to both reduce your taxes payable and receive a tax credit for each dollar you contribute to RSPs based on your tax bracket and unused RSP contribution room. For example, if you are in a 43 percent tax bracket in Ontario ( this means you earn between $98,041 and $150,000) for every dollar you invest in an RSP you get 43 cents back. This means if you are in this bracket and you contributed 10,000 to an RSP you would receive $4300 back assuming you had no taxes owing. This is what makes RRSP’s an ideal choice for high-income earners.
What are some of the downsides of RRSP contributions?
Heftty clawback on RRSP withdrawals before retirement
On the other hand, an RRSP only defers payment of income tax you will have to pay. This means if you withdraw the funds without using a government-approved program such as the homebuyers plan or the Lifelong Learning program you will face a hefty clawback of the tax credits at the time of withdrawal and you will also have the entire amount of the withdrawal added to your income. u.
The bottom line: Be Strategic about your RSP contributions and save up your room to reduce any taxes you will pay in your higher-earning years and to increase what you can save for your retirement! The extra cash generated from the RSP contribution can go a long way toward building your retirement nest egg!
What are other options for saving?
Those with a defined benefit pension plan, or who are working in retirement or report a lower income under $55,000 dollars per year may want to consider alternative savings options such as a TFSA, or non RSP .in consultation with your financial advisor.
If you want expert guidance on your financial situation, you should book your complimentary 30-minute build your financial IQ strategy session with our team to get started on your financial journey to reach the retirement of your dreams!