RRSP, TFSA and tax consequences. What to do?

It is that time of the year again where some of you may be wondering how much should I put on my RRSP? The answer will depend on which tax bracket you are in.

Sadly, I have had some individuals come to me at tax time with their RRSP contribution but no taxable income*. Is that common? Yes, it is. It happens more often than you think.

Unfortunately some financial representatives have sales targets to meet and may not offer what is best for you. If you want to invest your savings at your local bank, make sure you talk to your Accountant or Tax Preparer before. Find out roughly which tax bracket you will be in and what will make sense to you. Then, go to your financial institution and choose the best vehicle for you. Take control of your financial life. Nobody care more about your money than yourself.

Many people are missing the boat when it comes to RRSP. Let me share with you a common asked question. “If I put 5,000 into my RRSP, am I going to get back $5,000?

Let’s say you made $80K and your tax bracket is about 35%. You put $5,000 into your RRSP account and you will get back $1,750, which is 5,000 x 35%.

If you put $1,000 and had no taxable income, you get back 0 dollars. Got it? TFSA would be better in this case because whatever gains you get, will be tax free.

Let’s pretend you put that same $1000 dollars into a TFSA account yesterday. You made $10 dollars today. Tomorrow you decide to take your money out. You will get back 1,010 dollars tax free.

I am not a financial advisor. I just want to give you a general idea of how these accounts work and how it affects you in your tax affairs. Take charge of your financial life and go to the table well informed. This is not rocket science. You just need to utilize members of your team to help you move to the next level.

I have some suggestions for those individuals with no taxable income.

First ask yourself:

Do I have any consumer debt? If so, at what interest rate?
The next step is to find out what kind of return will you have if you choose some vehicles on a TFSA account?
Is the return more than the interest you are paying on your consumer debt?
If the answer is YES, then you could give it a try and put some savings in there.
If the answer is NO, it makes sense to pay off consumer debt first.

At the end of the day you will do what you think is best for you. I hope you have an idea of how RRSP and TFSA work and how it will affect your tax affairs. Take charge of your financial life!

Consult with your Accountant today to make an informed decision and keep more money in your pocket.

*No Taxable Income – if after all deductions and credits you have less than the yearly exemption $11,327 for 2015, you have no taxable income.

“Reduce risks, pay on time, be efficient and save money and time.” Renata Magalhaes