How do RRSP Tax Deductions Work?
Whenever you contribute (put money into) a 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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