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Why RRSP is the Best Way to Save Your Income Tax in 2021?

It is February. It is that time of the year, when everyone is looking to minimize their tax burden. You can minimize it by actively investing and buying insurance, loans, mortgage, etc. If you’re looking for intelligent avenues to invest your hard earned money & minimize the tax, then you’re at the right place. RRSP or Registered Retirement Savings Plan is an intelligent way to invest your money and save on tax. Further, it also gives good returns and helps you to fund your retired life. At Financial Advisor Scarborough, we provide you actionable financial advises and help you to save your money and grow your wealth. If you’ve not subscribed to our email list join today.

The year 2021 has born with the promise of hope and betterment and it is the right time to kick start your financial planning and tax planning.

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You might be wondering what people are arguing about when they talk about RRSP and TFSA. For starters RRSP, the Registered Retirement Savings Plans and TFSA, Tax-Free Savings Account both tend to your retirement planning and how you save a part of your earnings now so you may use it later.

Both these plans are aimed at investing a part of your contributions in instruments such as mutual funds, securities and bonds. The key difference between the two is however, when they are taxed. IN RRSP you will contribute the funds from your taxable income. Although you won’t be paying the tax for the funds right now, you will be paying them when you withdraw the funds after you retire. In TFSA however you will be contributing to the funds after you pay your taxes on your current income. This way the final withdrawal from TFSA comes tax free.

Now you might be wondering which of the two is better. The obvious answer is RRSP. Here’s a couple of reasons why,

Get Tax Exemption by Investing in RRSP

TFSA Canada

The RRSP saves your current taxes – Say for example you earn $100 and your current tax rate stands at 40%. This means when you make an RRSP contribution you will be paying against that 40%. The total tax you will have to pay for your $100 will be reduced now, since you are making an RRSP contribution out of it. This saving is going to be reflected when you finally withdraw the pension plan. When you compare it with TFSA you will have to pay the 40% tax out of your $100 and then make a contribution towards TFSA. This means a considerable amount of your earnings will go out as both taxes and to the TFSA Scarborough. Registered Retirement Savings Plan can save you a lot this way.

It is a Tax Deferred Investment

Second, the RRSP investments are tax-deferred. Any amount your RRSP Scarborough investments will not be taxed like in other investment plans. This means you won’t have to pay up capital gains taxes, dividends or even income taxes out of your investment. You can withdraw your money out of your investments as per your wish.

RRSP has Lower Marginal Tax Rates

rrsp scarborough

The third and the most amazing advantage of RRSP is that, when you retire your marginal tax rates tends to get lower than in your working years. This means when you finally withdraw your RRSP, you will be paying a lot less money as tax. When you compare this with TFSA, your contributions will be the same, but the taxes you will pay in TFSA will be much higher than in RRSP since TFSA demands payments from taxed incomes. The net tax paid will be much lower in RRSP. In other words, the net income earned will be much higher in Registered Retirement Savings Plan.

There are several types of RRSP plans available. Here’s a list of them,

Individual RRSP’s
Spousal RRSP’s
Group RRSP’s
Pooled RRSP’s

Each of these plans have their own provisions and benefits. However, the underlying principle remains the same. You get to save for your retirement, while the saved money makes you more money. More importantly you get to pay lesser taxes.

If you have any doubts, feel free to contact me anytime. You can also send a WhatsApp message to me now.

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