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• December 14, 2021

Pay Less Tax And Save More With An RRSP

Ever wonder how the wealthy make so much money but pay less tax than you do? What if I told you that they use a tax strategy to pay down their mortgages faster, fund property renovations, and create investment portfolios that you also have access to? You just need to know how to use it. 

Canada offers a perfectly legal way to tax shelter your money and it’s called an RRSP. Yes, the same RRSP you use to save for retirement, can help you also save money, pay off mortgage debt and build wealth faster.

Here are just a few ways it can be done:

Pay less tax and save more with an RRSP

One way to pay less tax each year and keep more of your hard-earned money is by sheltering that money in an RRSP. 

Taxes in Canada can put a hefty dent in your earnings. In Ontario, any income earned under $44,000 is taxed at the lowest tax bracket, approximately 20 percent, and the highest tax bracket starts at $220,000 and is taxed at 53 percent – that’s a lot of tax. Fortunately, you can reduce your taxable income and keep more of your money by making an RRSP contribution.

For example, If you were to earn $100,000 in income and put $10,000 into your RRSP you would only pay taxes on the $90,000 for that year. The $10,000 would be tax-sheltered in the RRSP and you would not pay income tax on that money until you take it out of the registered retirement plan. 

You would also receive a tax refund which directly equates to the tax bracket you are in. 

Every $100 contributed to an RRSP by someone who earned less than $44,000 would bring in a tax refund of about $20, and every $100 contributed on income over $220,000 would reap a refund of $53.

This is an excellent way for those who are in a higher tax bracket to pay less tax each year until they are in a lower tax bracket in retirement. You can further maximize this strategy by making a large enough contribution to reduce your income to a lower tax bracket and receive a significant refund that you can turn around and use towards your mortgage or to buy another home. 

Check out the tax calculator to see how much you can save!

Pay off your mortgage debt faster

You can also pay down your mortgage debt faster by using a refinance and RRSP strategy.

To explain how this works, let’s look at a client case study: 

John owned a home worth $750,000 and he was making $100,000 per year. Because John had $40,000 worth of contribution room in his RRSP for that year and had enough equity built up in his home, he was able to refinance his mortgage to pull out the $40,000 from his equity and put it into his RRSP. 

This resulted in John being taxed at $60,000 per year instead of $100,000 which saved him over $12,000 that he would have otherwise paid in taxes. From the $40,000 contribution, John also received an RRSP refund of $13,000. 

Although John had increased his mortgage debt through the refinance, he was able to get a much lower interest rate than he had before. This lower rate, coupled with the higher inflation rate of 4.8% meant that John was earning more money from the equity growth and tax deference than the interest payment he was making on his mortgage.

What about penalties? Because John was refinancing before his maturity date there was a $3000 penalty involved for breaking his mortgage contract early. However, the refund covered the penalty fee leaving John with $10,000 leftover he could now use towards paying down his mortgage.

Give your home value a boost 

Refunds can be used to your benefit in numerous ways.

You could also use an RRSP strategy to obtain the money you need to pay for the upgrades in your home. Certain renovations can realize a significant ROI and provide an instant boost to the resale value. 

Start an investment portfolio

The RRSP can also help to build wealth through real estate investing.

As you can see, your RRSP can be used to your advantage to save money, pay down your mortgage faster and even raise the value of your home. And when you have all three scenarios in play, it can also help you with purchasing your first rental property and start building your wealth. With an accountant and mortgage professional to help you with your numbers – you are closer than you think.

Ready to explore your options? Now’s the time to start working on your RRSP strategy so that you will have time to make any contributions or changes to your mortgage before the contribution deadline for 2021. We always recommend speaking with a professional accountant regarding your taxes, but you can always talk to me about utilizing your RRSP to pay down your mortgage and build wealth. Contact me today!

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