Alot of people arent totally aware of how the RRSP tax refund works, so I am going to do my best to explain it to you. I think it is important that people understand the pros and cons of RRSP`s and what this term even means.
First off and RRSP stands for (Registered Retirement Savings Plan)
This means the account is registered with the government and it helps you save for retirement by giving you tax saving incentives. What kind of tax incentives does it give me you ask?
1) Tax Deduction – This very simply means that every dollar you put in to your RRSP, Your income for the year will lower by exactly that $ amount for tax purposes.
2) Tax Deferral - Avoiding paying tax on current investment earnings, deferring the tax until a later date.
Example: Lets say you make $50k this year and you put $5000 in your RRSP.
- When you claim income taxes, you will only have to pay taxes as if you made $45k.
In the past you have perhaps got money back from your taxes?? The government would pay you back in the same fashion when you make a contribution to your RRSP. You would get a tax refund in the form of a cheque.
Most people want to see dollar amounts for contributions (vs) Refunds, so I am going to give a couple examples.
You make $50,000 in 2012 you will pay $8887 in tax and make a $5000 contribution to your RRSP.
Your income is now considered to be $45,000 and you would have paid $7330 in tax.
In this case you would get $1557 back in the form of a refund ($8887 - $7330)
One more quick example.
You earn $100,000 in 2012…you pay $26,912 in tax. You then Contribute $10,000 to an RRSP at Infinite Financial.
Now for tax purposed you earn $90,000 and pay $22,571 in tax.
($26,912 - $22,571 = $4341.00)
You would get a refund of $4341.00 from the goverment.
As you can see this is one of the PROS of investing using your RRSP as the savings vehicle.
All examples have been done based on Ontario's tax system (including federal tax).
To run these examples using your own numbers you can do this here - 2012 Canadian Personal Tax Calculator
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