Money & Career

How an RRSP can make your paycheques bigger

Author: Canadian Living

Money & Career

How an RRSP can make your paycheques bigger

Many Canadians don’t realize that if they make monthly contributions to their RRSP, they can actually increase the amount of money they get on each paycheque. Here’s how it works and how you can get more cash in your pocket.

The real reason for your tax refund
Have you ever wondered why you get a tax refund every year? It’s not because the CRA is feeling generous or rewarding you for your RRSP contribution. It’s because you’ve overpaid your taxes for the year. The government is actually paying you back the extra money you’ve paid them through miscalculated payroll deductions.

RRSPs reduce your tax bracket
When you contribute to an RRSP, your taxable income gets reduced. So if you make $40,000 and contribute $5,000, you’re actually taxed on $35,000. Of course, your employer doesn’t know how much you're contributing, so the company deducts taxes from your paycheque based on your salary. When you contribute, and therefore reduce your payable income tax, you get back the tax money that was already paid to the CRA by your employer.

Reduce your payroll taxes
If you contribute to your RRSP every month, you can actually get your payroll taxes reduced. You have to tell the CRA how much you plan to contribute -- most people who do this say they’ll contribute the maximum amount or about 18 per cent of your salary. Instead of getting the tax refund back at the end of the year, you can get it on every paycheque. It’s not extra money, but rather, your employer will deduct less payroll tax off each cheque as it will have a more accurate picture of your final income tax rate. Again, you won’t get any money back at the end of the year -- at least not for RRSP reasons -- because you’ll no longer be overpaying your taxes.

Fill out forms
To do this, you’ll need to show the CRA and your employer that you are contributing every month. You’ll have to fill out form T1213, Request To Reduce Tax Deductions At Source. It’s not complicated, but you need to do fill it out again every year.

The real benefit of regular RRSP contributions isn’t the increase in your paycheque, though it's certainly a nice bonus. It’s that the earlier you invest, the more time those savings have to grow. So instead of waiting until the last minute to put money in your account, start today and have this month’s payments grow over an entire year.

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How an RRSP can make your paycheques bigger

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