RSP SAVINGS AND TAXES
So yes, I decided to withdraw from my RSP savings to put towards all my common expenses, except food, gas, cat and truck repairs for the next 12 months. It was all money I had contributed to it in 2017 and before when I was out west. I kept what I contributed in 2018 in the account. So, I’m taking the savings from my years out west to put into my next year. And, in turn, my paycheques can go into savings, both to offset taxes through a 2019 RSP contribution and as a buffer.
Either way it takes a lot of stress out of things. It was a tough decision for me because for over a year I had kept that money in case I needed to buy a vehicle. Now, that risk hasn’t gone away, but I think I was meant to use this money this way. After all, if I hadn’t saved it I would be in the same position as if I had it and spent it all.
So yes, log onto www.tangerine.ca and explore their account options, like INTEREST bearing personal chequing (I was paying $11.95 a month at RBC), and, RSP Savings account. But first, look into a TFSA account, get those savings started and THEN look into an RSP. I say that because when you teach yourself to save, then you can lock those savings away for bigger things. RSP contributions reduce your taxes.
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As I explained, say you make $10,000 gross income and pay 10% in taxes ($1,000).
Well let’s assume your personal tax rate is 8%, this means, 1000 - 800 you will be receiving a $200 refund.
Now, let’s calculate it with an RSP account, let’s say you put $1,000 into an RSP, that’s only $2.74 a day (less than most people spend on coffee).
You still made $10,000 but with the deduction of your RSP contribution your taxable income is now $9,000. But you still paid taxes on $10,000 from your paycheque.
When you file your taxes, you will pay personal income tax rate of 8% on the $9,000 or $720. You’ve paid in $1,000 in tax. Your new personal income taxes due would be $720 instead of $800.
This means you will get $280 back in tax return instead of $200.
Otherwise, say you put the $1,000 into a regular savings account. At the end of one year you have about $1,010 (1%), plus your $200 tax return. If you put that money into an RSP savings account you'd have $1,010 (1%) plus $280 tax return (which you could put into your RSP and save even more on your next year's taxes).
So, in addition to the $1,000 you put into your RSP you just got another $80 more back in tax return. That’s the advantage of an RSP savings account. And it keeps building.
There are two ways to reduce your tax bill due when you file your income taxes.
How did I calculate how much I needed to pay in?
Calculate what you paid in the 3 taxes on your paycheque (Fed, EI, CPP). For each person this is a different rate, but I set mine to be 18% minimum due. This is based on my past paycheques.
Well, Walmart is only taking 15% or so from my cheque, this means I am short paying on taxes 3%. In my theory the government will want this money in March when I file my taxes.
So, I calculate 3% of my gross income and this is what I need to pay into my RSP. This reduces my personal income from a rate that 18% gets deducted from, to a rate 15% comes from.
So, this year I paid about $3,000 in federal taxes. If we use this calculation, then I’ve underpaid $900. So, at minimum I need to pay $900 into my RSP before the end of the tax year (for RSPs this is March 30th). It doesn’t guarantee a return, but it reduces the risk I’ll owe taxes.
Personally, I like to set my “personal tax rate” at 20% (Federal, CPP, EI deductions). So, I take 20% of my gross pay, deduct the taxes I’ve paid in, and the result is what I need to put into my RSP savings.
The risk? No different than your savings. Your principle RSP savings contributions are FDIC insured (the interest is not), just like your regular savings account.
I suggest having a TFSA account, and an RSP savings account. You contribute to the TFSA first, gets you almost the same interest rate and you don’t pay taxes on the interest you gain (you can contribute up to $5,000 a year, but as noted if you haven’t had an account this maximum is around $55,000).
Then, when you are financially stable, you transfer the funds from TFSA to RSP, before the end of the year. Your income tax return, since you now must file it online, will tell you what your maximum RSP contribution can be for the next year? It doesn’t matter, it’s usually in the multi-thousands. This RSP savings contributions for the year becomes a taxable income deduction for you.
If you take your RSP money out, you pay tax, at most 25%, so it’s best to take it out or ‘borrow it’ only for buying a house, an education OR when you have very low income that year (under $35,000). As 20% or so you will pay out in the Fed taxes will likely be more than you would owe on it that year. But, it’s best not to take it out, and slowly let it grow. It’s a nice … well, take me for example. If the universe allows my RSP withdrawal covers all my expenses for a year. That’s how helpful it can be, just like equity in a house.
If you are under 35 then I totally recommend you do this now,
1. open a chequing account at Tangerine (no monthly fee and they pay you interest!!)
2. open an TFSA account at Tangerine
3. open a RSP Savings account at Tangerine (not mutual funds, investments, JUST savings)
Start using your account, and when you have money you can save put it into your TFSA account. Then, at intervals, say, 3-6 months, decide if you can lock those savings in. Take the money you can really save and transfer it into your RSP Savings. Don't transfer it all, just transfer what you can afford to save.
Think of your future, do you want a house, an education in later life, or just to some day take a year and pay off all your expenses lifting a great weight off your shoulders.
It's this easy!
$1,000 = $ 2.74 a day or $19.24 a week or $81.19 a month
$2,000 = $ 5.48 a day or $38.48 a week or $162.38 a month
I did some more math, I spend $2 a day on coffee, five days a week, that's $520 a year just on a cup of coffee at lunch. Take a serious look at your spending, you can squeeze $2.74 a day from somewhere I'm sure.
OK, there’s my non-professional financial advice for you.
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