RRSPs offer two substantial
tax breaks. To really appreciate this, you should first be aware that
Canada has a "progressive" - or escalating - income tax system.
How does your income
fall into that lineup? The tax rate for your highest level of income is
called your "marginal tax rate." For example, if you have $65,000
of taxable income, your marginal tax rate - the rate for the $5,820 that's
over the $59,180 threshold - will be about 50-54% depending on the province
you live in.
TAX BREAK #1
This means you don't have to pay any tax now on the portion of your income that you put into your RRSP Suppose your contribution limit is $5,000 and you put in the full amount. Revenue Canada will let you subtract that much from your top level of income.
Immediate Tax Benefits
MARGINAL TAX RATEIn effect, the government is giving you an interest-free loan. The tax you would have otherwise owed now goes to work in your personal investment account. Or look at it this way: If your marginal tax rate is 50%, you have a choice between investing $5,000 in your RRSP or paying $2,500 in tax and then investing $2,500 elsewhere.
TAX BREAK #2
TAX-SHELTERED GROWTH MEANS MUCH MORE GROWTH
Normally, you must
pay tax on investment earnings each year. With an RRSP, you don't. As
with the up-front tax deduction on your contribution, that means money
that would normally go to Revenue Canada can now stay in your RRSP and
earn still more money.
MONEY GROWS FASTER INSIDE AN RRSP
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, Fiscal Agents Money Management Newsletter