Children under 18? RRSPs!
First I would like to wish everyone a Healthy and Happy New Year! Hope 2017 is the best year yet for you and your family!
If you have children under age 18, you really should consider purchasing RRSPs (Registered Retirement Savings Plans) before the March 1 2017 deadline. If you don’t have children under 18, give this article to someone who does!
What makes RRSP contributions different this year compared to previous years? The new Canada Child Benefit (CCB) that changed last July 2016 makes things more interesting and puts more money in your pocket!
First a quick review of RRSPs. Most people understand how they work: you make a contribution to your RRSP (or a spousal RRSP) and you can deduct it from your other income on your tax return to reduce your taxable income, saving you tax dollars now. Actually you are deferring the taxes until the time you take them out, but we will focus on the immediate tax savings for now.
For the 2016 tax year, you have until March 1 2017 to make an RRSP contribution and use the deduction on your 2016 income tax return.
Depending on your tax bracket, the savings vary: if your taxable income is $45,000 or less, your tax savings are about 26-28%; if your income is $45,000 to $67,000, the tax savings are 33% and higher incomes save more in taxes.
What makes things different now are for those of you that have children under age 18. The lower your combined taxable income, the more you get from the monthly Canada Child Benefit! Even more money in your pocket!
Let’s look at a couple of examples.
Let’s say your combined family income is $45 to 65,000 and you have two children. If you are the higher income spouse and your income is say $30-45,000, if you buy $1,000 RRSP, your tax savings are 28% or $280 AND you also increase your Canada Child Benefit by 13.50% for the year: you will get $11 more per month starting July 2017, that’s another $135 for 12 months; the RRSP tax savings increased from 28% to 41%. Now we are talking some serious savings. So you still have the $1,000 in the RRSP for the future and you get back $410 from the government in combined savings.If you have three children, the savings increase to 47%; if you have four or more children, the savings increase to over 50%! You just got back over half of your $1,000 RRSP!
Who potentially saves the most? Those families with combined income of $45 to 65,000 with one spouse earning $45-65,000 and you have four or more children. Your savings could be over 56%!
From a tax planning point of view it may make sense for families to consider using RRSPs to reduce their taxable income for 2016 and every year. You would defer taxes and increase your CCB starting in July 2017.
And the reverse is true too. If you have additional income (interest income for example) it’s like being taxed at a much higher rate since your Canada Child Benefit may be reduced too. Time to move any taxable interest income accounts to the Tax Free Savings Account! And maybe time to review any other income you are receiving and is there anything you can do about it (defer or shelter it).
I encourage families in January and February 2017 to do some tax planning “what ifs” and estimate the total savings from RRSP purchases. It’s more than just income taxes saved from now on. It may even be worth considering an RRSP loan to help save for your retirement and get maximum income tax and CCB savings now!
If you want some help, call or email me or stop by my office and I can provide an estimate of your overall savings. I will need your combined family net income (estimate it for 2016 by looking at year-end pay statements) and what each of your incomes are (will need to know the income of the higher income spouse). If we already have your info on file from your 2015 taxes, we can do some quick estimates for you.
If you are a grandparent, maybe this would be a good way to help your children and grandchildren financially, by helping them buy an RRSP now.
A reminder to all that Service Canada still comes to Ste Anne once a month (January 19, February 16, March 16) at the Bilingual Service Centre, 30 Dawson Road (next to my office). Programs and services offered are the same as those offered in person at a Service Canada Centre: Canada Pension Plan, Old Age Security, SIN, and Employment Insurance
And a final reminder to those that use their vehicle for self-employment income or employment income (employer signs a T2200): read your odometer January 1 (each year) to determine your total kms for the year!Please come to our annual Open House on Monday January 30 from noon to 7:00pm. Our tax team would love to see you before we get busy with your taxes starting February 15th.
Anni Markmann is a Personal Income Tax Professional and Certified Financial Planner; living, working, and volunteering in our community. Contact her at 204.422.6631 or 36 Dawson Road in Ste Anne (near Co-op) or Info@SteAnneTaxService.ca.