The only certainties in life are death and taxes, so the saying goes.
So, when tax season rolls around you dutifully submit your financial information to the government. And if you are like me, part of you dies a little bit inside when you see how much of your hard-earned cash you have to fork over to the government in tax.
And short of living off the grid in a cabin you built by hand from the surrounding forest, foraging for your supper, and eschewing all government services – there really is no way to avoid paying income tax.
But there is a way to pay less.
Recently a client came to me in frustration. Early last year, she had been promoted. With that promotion came a nice raise. Throughout the year, she enjoyed the perks of her increased income (as she should!)
But now the second certainty of life was upon her: taxes.
She had done some tax calculations and realized that her well-earned raise had bumped her into a higher marginal tax rate. She had paid much more in taxes throughout that year than in previous years.
That annoyed her.
Seeing that number in stark black and white made her realize all she could accomplish if more of that money was in her pocket, instead of dumped into government coffers.
So, I asked her: “Do you want to give all that money to the government, or do you want to build your wealth, contribute to your future, and get more money in your pocket right now?”
It was an obvious choice.
To make that happen, she would contribute more to her RRSP.
The government wants you to contribute to your RRSP. So as a reward, if you contribute to your RRSP, the government will reduce your taxable income by the amount of your contribution.
My client made $95,000 last year. Her taxes were deducted from each paycheck all year. If she made a $10,000 contribution to her RRSP, the government would look at that as a $10,000 reduction in her taxable income. So, essentially, as far as the government is concerned, she would have only made $85,000 last year.
But she paid taxes on $95,000. So now, the government owes her money. Approximately $3,300.
By contributing $10,000 towards her own retirement (building her wealth – not the government’s - and investing in her own future), she gets $3,300 back in her pocket.
That is a win-win.
She decided to make that money go even further by re-investing it. She also could have used it to finish her bathroom renovation, put towards dental veneers, or invest in a new work wardrobe to go along with her new job title. No matter what she decided to do, that money was back in her pocket to do with whatever she pleases. Sure, in retirement she will withdraw and pay taxes but by then she will be in a much lower tax bracket, therefore saving a considerable amount not only today but in the future as well.
If you are self-employed, you can use a similar strategy to reduce the amount you owe come tax time. Which, ultimately, results in more money in your pocket.
Determining exactly how much to contribute to your RRSP to reduce your tax bill should be a strategic decision that considers your cashflow, your previous contributions, your other financial goals, and your current marginal tax rate (and how to use marginal tax rates to your advantage). Although picking an arbitrary number to contribute (or using an online calculator) will result in some benefit, there are ways to maximize the benefit.
Book a consult with me to discuss how you can give less money to the government at tax time AND build your own wealth.