Have you invested in your RRSP for 2010? Are you using TFSA?

Registered Retirement Savings Plans (RRSP) are an easy way to defer your tax burden. Contributions that are made until March 1, 2011 can be deducted from your earned income in 2010 (certain limits apply see table below).

One particular feature of RRSP that could save you tax money during retirement is that a spouse can contribute to a spousal RSP.

–       How does it work? Instead of using your contribution room to pay into your own RRSP you pay into your spousal RSP and still deduct it from your earned income.

–       When can this be advantageous? If one spouse is in a higher tax bracket than the other and has already saved a higher amount in their RRSP. This will even out the RSP balances and gives more flexibility during retirement, while withdrawing money and paying taxes.

After you paid into your RRSP and still have extra money you should consider opening a Tax-Free Savings Account (TFSA). This was introduced in 2009 and allows every individual above 18 years to save up to $5,000 a year. The savings and any distributions or capital gains accumulate tax-free. The money can be accessed anytime and no taxes need to be paid. If you haven’t opened a TFSA account yet, you could use the accumulated unused contribution room for 2009 and 2010 plus this year contribution room and pay $15,000 into a TFSA.

RRSP TFSA
Contributions Tax-deductible Not tax-deductible
Annual contribution limit 18% of previous year’s earned income, maximum $22,000 in 2010, less pension adjustments $5,000 plus amounts withdrawn in previous years
Unused contribution room Carried forward Carried forward
Growth Tax-deferred Tax-free
Withdrawals Taxable Tax-free
Withdrawn amounts Contribution room is lost for amounts you withdraw Added to contribution in future years
Plan maturity End of year when you turn 71 None, no upper limit on contributions
Spousal plan You can contribute directly to a spousal RSP You can give your spouse money to contribute to their TFSA
Eligle investments Exchange listed stocks, bonds, GIC, mutual funds, cash, Exchange listed stocks, bonds, GIC, mutual funds, cash,

Of course, should you want to save for your children or grand children education you should consider a Registered Education Savings Plan (RESP). The government is adding 20% to the first $2,500 in contributions to the beneficiaries RESP each year.

Another government sponsored savings plan was introduced recently for people with disabilities. With a Registered Disability Savings Plan (RDSP) the government gives up to $3,500 in grants to the beneficiary each year.

The following table compares the taxation of different income sources for an Ontario based tax payer. For example, if have a portfolio of 2 Million dollar and earn 4% in dividends from Canadian public companies you receive a before tax income of $80,000. This translates into an after tax income of $72,500 or a average tax rate of 9.38%. If you would earn the same $80,000 but from interest payments you receive after tax only $60,199 or an average tax rate of 24.75%.

Before Tax Income After tax income from Capital Gains Average Tax Rate After tax income from dividends – eligible for enhanced dividend tax credit (public companies) Average Tax Rate After tax income from dividend – eligible for small business tax credit (CCPcs) Average Tax Rate After tax income from employment Average Tax Rate After tax income from other income like interest or rental income Average Tax Rate
$20,000 $20,000 0.00% $19,700 1.50% $19,700 1.50% $19,418 2.91% $19,260 3.70%
$40,000 $39,260 1.85% $39,400 1.50% $39,284 1.79% $34,540 13.65% $34,382 14.05%
$60,000 $56,881 5.20% $56,674 5.54% $55,655 7.24% $47,626 20.62% $47,468 20.89%
$80,000 $74,471 6.91% $72,500 9.38% $71,090 11.14% $60,357 24.55% $60,199 24.75%
$100,000 $90,884 9.12% $87,298 12.70% $86,088 13.91% $71,752 28.25% $71,595 28.41%
$120,000 $107,598 10.34% $103,874 13.44% $99,730 16.89% $83,070 30.78% $82,913 30.91%
$160,000 $140,404 12.25% $133,871 16.33% $126,702 20.81% $104,717 34.55% $104,559 34.65%
$200,000 $171,846 14.08% $162,597 18.70% $153,524 23.24% $126,153 36.92% $125,995 37.00%
$240,000 $203,164 15.35% $191,322 20.28% $180,496 24.79% $147,439 38.57% $147,282 38.63%
$280,000 $234,146 16.38% $220,048 21.41% $207,468 25.90% $168,875 39.69% $168,718 39.74%
$320,000 $264,864 17.23% $248,773 22.26% $234,439 26.74% $190,311 40.53% $190,154 40.58%
$360,000 $295,582 17.89% $277,499 22.92% $261,411 27.39% $211,748 41.18% $211,590 41.23%
$400,000 $326,300 18.43% $306,224 23.44% $288,383 27.90% $233,184 41.70% $233,026 41.74%
These calculations are for illustration purpose only. These are estimates for potential taxes for an individual Ontario resident in 2011, no special individual circumstances are considered, as for example potential CPP, EI premiums or payments, income splitting, deductions, etc. As we are not tax advisors, please see your tax accountant to consider your personal circumstances.
Source:  individual Ontario Resident, Taxes for 2011, http://www.taxtips.ca/calculators.htm, Schwaben Capital Group Ltd.

We hope the brief tax ideas have been of interest and look forward to hearing from you if you have any questions. You can reach us at 416.572.2265 on our general number or Albrecht at 416.477.7216 and Bernd at 416.477.7217 directly.

We will have our portfolio review and capital market analysis and outlook within the next week.

You can also find this, past and future newsletters on our Blog at https://schwabencapital.wordpress.com .

If you have any questions, give us a call!

Albrecht Weller                                    Bernd Henseler                                        Martin Häfele

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2 thoughts on “Have you invested in your RRSP for 2010? Are you using TFSA?

  1. You mention that after you contribute to your RRSP, if you have money left over, you should contribute to your TFSA as well. There are actually a lot of cases where you should put money into a TFSA before an RRSP, such as if you are in a relatively low tax bracket. You can use a calculator to try some different scenarios to see if a TFSA or RRSP is better to put your money into first.

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