If you’re like my family (and most Ontarians for that matter) then once or twice a year you probably end up across the border in the US. Be it for business, a vacation, sports tournament, etc. Regardless of the reason for the visit, at some point, some shopping occurs.
My wife loves Target in particular. She can easily spend hours there without any issue whatsoever. Now, I don’t have a problem with my wife shopping at Target but, I do like to look through the cart to make sure that we aren’t buying items that would cost less in Canada after the exchange rate is taken into account. It drives me nuts when we buy five tubes of toothpaste, or 20 pairs of socks, only to realize when we get home that it was 25 cents more per tube there than we could have paid here at home.
Now I am sure some of you are thinking, “there’s some things you just can’t get here in Ontario and I will agree with that, but, if we’re going to be lugging stuff across the border, for the most part, I want to make sure we’re getting 10% to 20% savings by shopping over there. Makes sense, right?
We need to treat our RRSP’s in the same way. There is a virtual exchange rate game that we play with Revenue Canada when we deposit money and when we withdraw money from our RRSP’s.
You see, Revenue Canada treats any deposit into an RRSP as tax “Deferred” income based upon your salary in that year. So, for example, if you are earning $75000 per year at your job, then you are currently in what I call for simplicity sake, the 30% tax bracket. (Please don’t bite my head off accountants).
Now, that means that for every dollar you invest into your RRSP, the government will give you $0.30 back when you do your tax return. They do this because you’ve already paid the tax when it was deducted from your paycheque. Where the exchange part come in is at withdrawal time.
At some point, you are going to start to withdraw that money. And ideally, what you’re aiming for is to be in a lower tax bracket when you’re pulling money out then when you were putting it in. Just like when you buy that sundress for $23 U.S that costs $45 back home.
This is very doable for most Canadians because their income is much lower in retirement than when they were working and their expenses have gone down too. For example, once you’re retired, you won’t have to drive to work any more, you won’t need work clothes, your children will have hopefully moved out etc. In addition, if you’re married, the government also lets you do something called “Income Splitting” that helps you keep the taxes lower. (We’ll save that topic for another blog)
Now to continue with the previous example, when you were making $75,000 a year, the government was giving you $0.30 cents back for every dollar you deposited. Now when you start to take some out, you will be in the 20% tax bracket, which means you save 10%. Who doesn’t love 10% off???
Don’t Get Short Changed
In the same way that you can get ripped off by buying something in the US that would be cheaper in Ontario, there are a couple things you should try to avoid with your RRSP’s.
- It is going to be hard to withdraw money from your RRSP’s and pay less than 20% tax. So, if you’re currently only paying 20% to 24% in taxes at work right now, then RRSP’s probably aren’t the Investment vehicle you should be using right now. Instead, focus on filling up your TFSA. If you don’t know what tax bracket you are in, click on this link for an easy to read chart.
- Don’t wait until it’s too late. Conventional wisdom over the last 20 or 30 years has been to hold off on withdrawing any money from your RRSP until you reach the maximum age of 71, But when you do that, you risk withdrawing the money at the same or even higher tax rate then when you deposited the money in the first place. In fact, the law states thar upon the passing of the surviving spouse, all RRSP’s must be liquidated and added as income to your final tax bill. I have seen this push people into the 50% tax bracket. Just imagine half of your investments going to the tax man. Doesn’t feel good, does it.
If this seems too complicated to understand, don’t worry. Just like shopping, investing and tax planning is a team sport and I am here to help you and your team to sort all out all these tough questions. Just give me a call at 519-721-7254 or if you prefer, send me an email firstname.lastname@example.org