How RRSP Is An Important Tax Planning Tool For Canadians

February 22, 2019

How RRSP Is An Important Tax Planning Tool For Canadians

Most Canadians understand the significance of an registered retirement savings plan (RRSP) as a valuable platform to prepare for retirement. While there are many benefits in making contributions to a savings account, you can use RRSPs as a tool to plan your tax-related financial matters. You should look at RRSP from a tax planning perspective before it reaches the deadline for RRSP contributions in February.

“A penny saved is worth two pennies earned . . . after taxes. ”
― Randy Thurman

When you decide to contribute to an RRSP, your money will remain tax exempt for as long as you keep it in the plan. It will help you reduce your tax burden each year. You’re taxed on your net income which is your total income after deducting the contributions you made to your RRSP. This way you not only use RRSP as an effective tax strategy but also as a dependable retirement planning instrument.

Making strategic use of RRSP

It’s important to use RRSP and other tax-saving options strategically in order to significantly reduce your tax bill. Your tax rate when you contribute to RRSP and when you withdraw funds is one of the most important considerations. Contribute to RRSP when your tax rate is high, and withdraw the funds in retirement when your tax rate is low. Also, a combination of RRSP and TFSA will make your financial situation even more promising.

It’s always a good option to put your RRSP tax refund into TFSA. As compared to RRSP, TFSA is more flexible because it’s tax-free. There is also no tax deduction at the time you withdraw money from TFSA. On the other hand, making a fund withdrawal from RRSP will be taxable. In situations where you have to withdraw money on an emergency basis, take it from your TFSA.

Splitting income with a spousal RRSP

When it comes to tax-saving strategies, splitting income with your spouse is probably the most effective way of optimizing your income for tax. While there is a limit as to what you can contribute to RRSP, you can make the contribution either to your account or to that of your spouse who has lower income.

It’s a good idea to split your income and have your spouse contribute to his/her own RRSP. At the time of retirement, you and your spouse can withdraw from their own account which is a more tax-efficient way. You should consult a financial planner who specializes in tax and retirement planning to develop a tax-saving strategy that fits your unique financial situation.

Don’t just treat your RRSP account as a place to save for retirement, use it to reduce how much you hand over to the government. Talk to a financial expert to learn how to use RRSP and TFSA as a combination to achieve your retirement goals.

Related: TFSA vs RRSP: What’s Best For You?

Kewcorp Financial

Kewcorp Financial is a trusted financial management company based in Edmonton where individuals and businesses can learn how they can optimize their wealth by paying less in taxes. Give us a quick call to discuss your finances and taxes with us today!


Jim Kew

Financial Planner
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Scott Kew

Financial Planner
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