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Contributing to a Registered Retirement Saving Plan can have some major tax benefits. The RRSP contribution is usually exempt from tax. You simply have to keep the money in the plan in order to avoid paying taxes. If you withdraw a portion or all your RRSP, you will be required to pay taxes for the amount withdrawn.
Advantages Of RRSP
Other than helping you lower your tax bill, RRSP makes it so much easier for you to save for retirement. It allows you to effortlessly set aside money rather than having to receive your income then pay cash to cater for the RRSP. In fact, it makes more sense to pay the RRSP first than receiving all your income after tax and then investing a portion of it in a retirement plan. Because this contribution is tax deductible, you are able to invest your money first and then pay the tax on your yearly income after removing the contribution. This can put you in a lower tax bracket and allow you to optimize your savings.
What If You Take Money Out Of Your RRSP
Additionally, you must report the amount you take out from your RRSP as taxable income when filing. This means that other than the withholding tax which you paid when withdrawing the money, you will still have to pay more tax when you take out an amount on your RRSP. The amount of tax you pay will depend on your total income and tax situation.
How To Borrow Money From RRSP Without Paying Taxes
Most people will avoid withdrawing money directly from their RRSP because of the resulting taxes. However, there are situations where you can borrow money from your RRSP and won’t pay taxes. For instance, if you are planning on using the money as a down payment to buy your first home, you won’t be charged any tax when withdrawing. Just make sure the money is paid back in full within the next 15 years. You can only borrow up to $25,000 from your RRSP.
Additionally, you can avoid paying taxes on your RRSP if you borrow up to $20,000 in order to pay for an education or training. However, there are limitations as to how much you can take out in a year. You will also be required to pay back this money within the next 10 years. You can only borrow this money to pay for your education, not your child’s.