Tax time

Well it is almost the end of February and in Canada that means this is your last chance to get RRSP's enrolled to use against last years taxes. I've written about this before but it is important. I don't really know that much but I'll share a few things I am aware of.

What is TFSA, this has zero to do with RRSP's. A tax free savings account is simply a shelter against tax on the interest accrued in the account. If you do not have a TFSA at present I strongly suggest you get one. Every year you are allowed to put x amount into an account of this type. Currently it is 5500/yr, a few years back it was only 5000/yr. However this is cumulative, so since they were introduced in 2008 until this current year you could theoretically have as much as 36500 in deposits. While most, including me, won't be anywhere near having that amount at present, so long as you make a deposit of any size into this type of account every year you continue to build up how much you can have in this type of account. I plan on utilizing this more and more as I approach retirement and back off on the RRSP portion of my savings plan. Also TFSA accounts are not limited to simple interest bearing accounts but can also be used for Mutual fund and commodity trading among other things. Once at retirement age the Gov't will force you to start changing your RRSP's in RIF's but have no control over what you take or don't take out of a TFSA. If anyone wants a little further clarification there are many good internet sources on the subject, just Google it.

What is an RRSP. In layman terms these are a tax shelter. You are deferring tax payment to down the road. The theory is you will pay less tax on the money until later because you are taking your top wage dollars for this year and putting them into a lower tax bracket down the road. For instance, if you made 50000 last year you would be in the 29% bracket. However if you dropped 5000 into an RRSP that would be roughly 1500 in tax savings. In retirement lets say your income was 40000. Then you would have to repay those savings from earlier but you would be in the 22% bracket now. That is a savings of 350 dollars roughly. Plus you have the 1500 to invest in the interim so potentially you could end up making enough money off compound interest to make the entire 1500 dollars double or triple depending on the time frame and how your investments do.

Now even if you are in a lower tax bracket already RRSP's are still good to invest in. Especially if you see a future potential of an increased income. When you take out an RRSP you do not have to apply it in that taxation year. You can defer it for as much as 7 years before you use it. If you made only 35000 there really is no advantage to using your RRSP against that amount. You are already in a low tax bracket so it is revenue neutral. Even though you would get a bigger tax return this year, in the long run you are better off to defer it. It is really easy to do and when you get your Assessment from CRA it will list your unused RRSP contributions at the bottom. I did that a couple of years back and it was a shrewd move.

Younger people, listen up! As much as I am building up a fund now I do surely wish I had started younger. The earlier you get going on this, the more it will become. It is the Snowball effect as your money rolls over and accumulates. I started in my 20's and cashed them in before I was 30 and never got serious about it again until I was 40. I am fine, God is good, and whether I have much or little I will persevere. That being said I can see the folly in the younger me. I can't reach him but maybe I can reach you. Please start today.

Please learn how to do your taxes on your own. For most people they are not that complicated but these tax service companies will charge you a fee and often miss obvious deductions that you will not receive because they just aren't that good and the people that work there are only in it for a pay cheque. If you have a real problem with math or reading all the rules and regulations get a trusted friend or family member to help you. If you know me outside of my blog I would gladly help you. I'm not an expert but can read a few lines in the tax guide as well as anybody.

Lastly, please do not believe it when people say I don't want too much overtime because it costs me money. It is simply not true. On 1 particular pay cheque it is possible but even that is unlikely. If you made enough money to jump ever so briefly into the next higher bracket it could cost you a few dollars on that particular pay. However at tax return time that money would be recouped. Making more money always means making more money in our taxation system as it is today. It may or may not have been true at one point in time but that was ages ago and it is certainly not true today. If you make more money, it means you make more money, period, end of statement.

Thanks for paying attention. You have about a week to make another RRSP contribution so get on it!

Blessings!  :)