How do I pay less tax? part 2

Part Two

Denial is Bad, but Tax Deferral is good.

A life coach would teach that deferring a problem is a bad character trait.   However a financial coach would say that deferring a payment keeps cash in your pocket longer and allows you to invest your money.

Likewise deferring paying your taxes keeps your cash in your pocket longer.   Do not confuse this with tax avoidance or tax evasion.   Also if you have been assessed as owing taxes from a previous tax return, then you do need to pay this as soon as possible since the C.R.A. does charge fines and monthly interest charges on overdue taxes.   Tax deferral is a good and legitimate tax strategy, which is offered to you by the government to encourage you to save your money for the future.

The System for the individual to defer paying personal income tax is to put their money into a savings account or an investment account and then to request that the fund is registered.   This is called a Registered Retirement Savings Plan.

The word of caution for this plan is that there are three separate stages to setting up an RRSP.

  1. Have a plan for your retirement;
    1. discuss your goals,
    2. and how long you may need the income in retirement.
  2. Choose the appropriate investment options.
    1. Choose a mix of investments types and risk levels
      1. Bonds
      2. Segregated funds
      3. Mutual Funds
      4. Real Estate
      5. Exempt Market Funds
  3. Choose to make the investment tax Sheltered.
    1. Choose an RRSP
    2. Or Choose an TFSA

Please be aware that whenever someone is “selling” you an R.R.S.P. they need to discuss all three stages with you.   Be very cautious of some advertising that does not offer all three stages.

The benefit of an R.R.S.P. is that when you deposit money into your R.R.S.P. that money becomes “Tax sheltered” and therefore it is non-taxable income, to be reported on your next tax return.   If you had tax deducted from your pay checks then this is good for you as it will be refunded to you on the tax return.   While the money remains in the fund it does not cause any new taxable income from dividends, capital gains or interest income, which is the quality of being tax sheltered.

What are the complaints?

  1. Ironically the issue of being tax deferred is what most people complain about. This means that when you withdraw the money from R.R..SP. then the money is reported as taxable income.   While this is a problem for the tax return to have additional taxable income, the big picture is still that the money was refunded in the year that money was contributed to the R.R.S.P., which is the benefit to you of having deferred paying the tax during those years.
    1. Deferral of paying taxes is good.
    2. It is important to plan out how you withdraw the money.
      1. Do not withdraw it all in one year…
  2. The other reason that some people complain their R.R.S.P. is the results.
    1. Please keep in mind that the results are a factor of the fund and not the registration.   
    2. If you are not happy with the results then please speak to an independent financial adviser and get new advice and transfer your money to a different investment.

Additional benefits of a R.R.S.P. tax deferral. 

  1. The potential to have the refund at higher rate then what the withdrawal will be taxed at.
    1. Simply your contribution is made during your high earning years, while the withdrawal is made during your retirement or lower income years.
    2. So your income tax refund may be generated at higher rate than the income tax calculated against the withdrawal of the R.R.S.P. fund.
  2. The second is the simply the opportunity to reinvest the refund.
    1. Imagine the potential to re-invest your tax refund and keep it in your fund until retirement and then when you withdraw the money you are at a lower tax bracket and so the withdraw is taxed less than the original refund gave you.  It is potentially a triple bonus strategy.

Spears Bookkeeping seeks to offer you with strategies to lead you to business and personal success.

Please speak to Tania about an R.R.S.P. and let her refer you to an independent Financial Adviser, who will lead you through the three stages of the setting up an R.R.S.P.

Please keep in mind that if someone just takes your money without discussing the three stages, then you need to stop and find a better adviser.

Thank you

Please watch for the next Blog entry to discuss another Tax strategy.

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