RHYS MARTELL  |  financial advisor

How do RRSP Tax Deductions Work?



Whenever you contribute (put money into) an RRSP the contributions are tax deductible, up to certain limits.


But how does that work?


Here’s a simplified example:


Let’s say you’re an employee and you make $150,000 a year. And all year long tax is being taken off your cheques whenever you get paid.


Now let’s say your tax rate is 40%. And you decide that you want to put $10,000 into your RRSP to save for retirement.


So far, you’ve been taxed based on making $150,000. But when you put $10,000 into your RRSP, the government sees that $10,000 as income for later, when you retire. So really, you only made $140,000 this year. So they have to give you the tax back on that extra $10,000.


And at a 40% tax rate, that’s $4,000 back. In your pocket. Not the government’s. And that is lovely.

 

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