{"id":559,"date":"2023-09-03T19:11:51","date_gmt":"2023-09-03T23:11:51","guid":{"rendered":"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/?post_type=chapter&p=559"},"modified":"2024-11-28T17:59:39","modified_gmt":"2024-11-28T22:59:39","slug":"personal-savings","status":"publish","type":"chapter","link":"https:\/\/pressbooks.bccampus.ca\/financialfreedomfortrades\/chapter\/personal-savings\/","title":{"raw":"Personal Savings","rendered":"Personal Savings"},"content":{"raw":"Tax-Advantaged Accounts<\/span>\r\n\r\nWith regular investment accounts (brokerage accounts), Canada Revenue Agency would tax investors as described above.\u00a0 There are a number of Tax-Advantaged accounts that Canadian tax residents may benefit from.\u00a0 These accounts have significant advantages in that the earnings in the account usually grow tax-free, individuals are able to defer taxes, and some allow one to also reduce the tax liability starting in the year of contribution.\r\n\r\nUnderstanding the common tax-advantage accounts and its benefits will allow individuals to really build up their wealth at a much faster pace on the road towards financial freedom.\r\n\r\n \r\n\r\nRegistered Retirement Savings Plan (RRSP)<\/span>\r\n\r\nA Registered Retirement Savings Plan is an account in which you, your spouse or common-law partner can contribute to.\u00a0 These RRSP contributions made can be used to reduce the amount that is subject to tax, to arrive at a lower taxable income amount.\r\n
\r\n

Example: RRSP Contribution Room<\/p>\r\n\r\n<\/header>\r\n

\r\n\r\nMark has reviewed the last Notice of Assessment filed on the Income Tax and Benefit Return (T1), confirming that there is available contribution room limit for 2023 of $30,000.\u00a0 Mark has never contributed to a RRSP account before.\u00a0 Mark has available funds of $10,000 savings this year, and makes a contribution to the RRSP account on February 15, 2024.\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
Timeline<\/td>\r\nAmount<\/td>\r\nTax-Effect<\/td>\r\n<\/tr>\r\n
Mark reviews RRSP Deduction Limit Statement on Notice of Assessment<\/td>\r\n$30,000 for 2023 tax year<\/td>\r\nNon-taxable event<\/td>\r\n<\/tr>\r\n
Mark makes a contribution to RRSP account up to 60 days of following calendar year<\/td>\r\n$10,000<\/td>\r\nRRSP tax slip issued to Mark by March 31, 2024<\/td>\r\n<\/tr>\r\n
Mark files T1 Tax Return<\/td>\r\n$10,000<\/td>\r\nDeduction of $10,000 can be taken to reduce taxable income and tax liability for 2023 taxation year.<\/td>\r\n<\/tr>\r\n
RRSP account investments grow to $17,000<\/td>\r\n$17,000 total account value ($7,000 income earned)<\/td>\r\nNon-taxable event<\/td>\r\n<\/tr>\r\n
Mark withdrawals $17,000 from RRSP account in retirement<\/td>\r\n$17,000<\/td>\r\nTaxable event.\u00a0 All withdrawals from RRSP account are taxable in year of withdrawal unless under approved plan (eg. Lifelong Learning Plan (LLP), Home Buyers\u2019 Plan (HBP))<\/td>\r\n<\/tr>\r\n
Alternative: Mark turns Age 71 and RRSP account mandatory turns into RRIF (Registered Retirement Income Fund)<\/td>\r\n<\/td>\r\nTransfer of RRSP to RRIF not taxable event.\u00a0 However, RRIF has mandatory minimum withdrawal amounts each year that will be taken into taxable income.<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n \r\n\r\n<\/div>\r\n<\/div>\r\n \r\n
\r\n

Tax Tip: Delaying RRSP deduction<\/p>\r\n\r\n<\/header>\r\n

\r\n\r\nWhen a RRSP contribution is made for a taxation year, a full deduction is available on the tax return to reduce taxable income, in turn reducing the tax liability for the year.\u00a0 Even though an individual makes a RRSP contribution, it is not required to take the deduction in the same year.\u00a0 Individuals, such as trade apprentices, may only be employed for part of the year or have significant tuition tax credits, may have a lower taxable income in the year that a RRSP contribution is made.\u00a0 If a trade apprentice estimates that a future taxation year will be at a much higher marginal tax rate, then a RRSP deduction can be taken on the next tax return making the tax benefit higher.\r\n
\r\n

Example<\/p>\r\n\r\n<\/header>\r\n

\r\n\r\nEvelyn is a metal fabricator trade apprentice, and only worked half the year due to attending the last 2 technical block training semesters of the program.\u00a0 For the 2023 taxation year, Evelyn made a RRSP contribution of $5,000 to the RRSP account.\u00a0 Evelyn estimates the marginal tax rate is 20% for the 2023 tax year based on the Federal and Provincial tax brackets.\u00a0 For the next calendar year 2024, Evelyn will have a significant raise in her annual salary as Evelyn will have the Red Seal Endorsement in the trade.\u00a0 Also, the employer provides a signing bonus once she starts working full-time as a journeyperson.\u00a0 Thus, Evelyn will probably have a marginal tax rate of 42% in the following 2024 taxation year.\r\n