Source
r/personalfinance•
SmallOrange

Contribute to RRSP's or Have More Tax Deducted From Pay? (Canada)

I am in Canada, if this matters.

I am currently 29F, making 54k a year and get paid weekly (785 a week after taxes) and am debating on whether to contribute to an RRSP (I cannot do this through work as I am contract) OR have more taxes deducted by my pay. I cashed out what I had in my pension program when I quit my last job to pay off a debt. I will now owe the government just over 2000 dollars because of this.

I am not as concerned specifically about retirement but am concerned about having to pay out large sums of money every year for taxes. I used Turbo Tax's Income Tax Calculator and, provided I do not change anything, will owe roughly $500 dollars each tax year. I would prefer to have a refund.

I think I would prefer having the taxes increased on my pay but am not sure if this is a better option than contributing to an RRSP. I am just not sure how much I should be paying into either.

An example of what a month looks like for me financially:

$3140 Net Pay

$1200 Rent/Parking $140 Car/Apt Insurance $60 Student loan (less than 2k owing) $30 Hydro $130 Cell phone/Internet $200 Gas $450 Grocery $200 Spend $50 Gym $600-$700 or Whatever's left over on Mastercard. ($7500 owing, projected to be paid off in a year or so).

With both remaining debts being paid in 12-15 months, I can stand to drop my net income a bit.

Do you have any suggestions to increase my tax refund substantially? Is there any other information that could paint a better picture of my situation?

Thank you.

Posted Jul 8, 2014, 2:58 PM UTC

212
nolancamp2Canada•

You should be contributing to your RRSP anyway.

3
SmallOrangeOP•

I was up until a year ago but switched employers and my current one does not have an RRSP program, so I didn't continue it. My income also increased by over 10k a year and this is the first time in my life I've owed the government anything because of that.

1
nolancamp2Canada•

You don't need to have an RRSP through an employer. You can open one yourself at any bank or brokerage.

1
lilfunky1•

Do you have any suggestions to increase my tax refund substantially?

Increasing your tax refund means you've been overpaying throughout the year... why do you want to give the government an interest-free loan on your money all year long?

1
SmallOrangeOP•

Well, I don't.

1
sonalogy•

Increasing your tax deductions means you give the government more money, they hold on to it longer, and then return it to you interest free.

Contributing to your RRSP means you save money for retirement, it has the opportunity to earn interest, and lowers the amount you owe in taxes in the contribution year.... so you pay less in tax, which means more money for you.

Increasing your taxes to increase your refund literally makes no sense. You are giving the government money so that they can give it back to you later.

1
SmallOrangeOP•

Thanks.

This is the first time I've had to seriously consider this. Due to a substantial increase in my income, I have always had tax refunds and have never owed before. This information is new to me. Based on this the obvious choice is RRSP's. What are your thoughts on a tax free savings account?

1
sonalogy•

Tax-fee savings accounts are great, because they allow whatever you invest in them to grow tax-free. They are also more flexible than RRSPs, in that you can take money out of them at any time without incurring taxes, and then (in the following year) put that money back.

But they don't reduce taxes year to year. You just don't get taxed on whatever is in there.

Keep in mind that RRSPs are technically a tax-deferral. That is, they reduce your taxes when you put money in (and the money in an RRSP can grow tax-free) and but when you take money out at retirement, that is taxed as income. In theory, what you will retire on is less than your income while you are working, so you should come out ahead.

However, it sounds to me like you should be less worried about how to decrease your tax burden, and more worried about how save and invest money for retirement. That $500 a year beyond what is deducted is not a big payment in taxes. Time to start looking into these things, I think.

1
SmallOrangeOP•

I had to claw my way out of some very serious debt (which is almost gone) so am only now at a point where I am financially stable and can put chunks of money away for savings, and that's something I definitely want to work on.

I will investigate a tax free savings account and setting up some RRSP's. I do have some RRSP's, but they've been untouched a while...

2
BritawaterCanada•

This all depends what you are planning to out in your RSP. What are you planning to put in if you were contributing on your own without work?

1
SmallOrangeOP•

Truthfully, I don't know how much I SHOULD be putting down in relation to my income and expenses. I could conceivably throw a few hundred dollars at RRSPs and Savings and would be fine with that, but I also have a fear of leaving myself short. I would not miss an extra 200 dollars a month or so I guess.

1
[deleted]•

[deleted]

1
SmallOrangeOP•

I know nothing. Previously my RRSP's were all handled by Sunlife who I had it invested with, so this is a new area for me. I believe I have access to what percentage of the money was going where.

1
BritawaterCanada•

Well, Sunlife has extremely high MERs, which are management expense ratios. Over time, this amounts to thousands of dollars of fees. You should invest in index funds, which is pretty much what the Sunlife person is doing for high costs. Check out r/personalfinancecanada, ask them some questions. The Global Couch Potato is a low-fee index portfolio and it is an excellent place to start. Also, you should read some books on index investing, I strongly recommend reading Millionaire Teacher by Andrew Hallam, and Boglehead's Guide to Investing by Labeuf.

1