What are RRSP's and why is there a season?!?

Let's break this down. It's a bit boring but bear with me.

First off - taxes right! What a b*tch! "You don't pay tax, they take tax" as Chris Rock would say. We have taxes taken off our cheques and then we pay more tax when we go our and spend that reduced work dollar! Boo-urns.

So RRSP's - and tax here we go -

RRSP's stand for Registered Retirement Savings Plan.

What does Registered mean?

Well, you have declared to the government that you are taking action for your retirement and that means you won't be totally dependent on them for money!

You can choose any kind (portfolio mix and risk) or vehicle of investments and 'register' it. That means a mutual fund can be registered or non-registered and by the same token your stocks can also. People often say to us that they mutual funds, and that means they are RRSP's. Not necessarily - you can use any type of savings and register it.

They (the government) like this, and so they say "whatever you put into that registered savings plan, you will be allowed to take off your income at the end of this year and not pay tax on it."

This is why you get money back.

You paid tax on this money when it came off your pay cheque, so you get the tax you paid returned to you once you do your tax return.

Ex: If you made $40,000 in 2011 and paid tax on your pay cheques all year, then you contributed 10,000 into your RRSP's you will deduct 10K from 40K = 30,000 in income. So your tax bracket will be lower in some cases and also you will get back what you paid on that money in tax. So it's just a return of your taxes paid up front at the end. Clear as mud?

What's the catch?

You will have to pay tax on it later - when you finally use it as income, when you are retired or if you pull it out early for a major purchase (if you use it as a first time home buyers you have an exception to this rule). It's not a penalty per say, it's just you can't have that money without the government getting their precious taxes!! So if you use it now or later you will have to fork over the tax at whatever point you withdraw that money OUT of your RRSP's.

RRSP's are not the perfect or the only savings tool for everyone. We have to assess a few things to figure out if it's something that will benefit you. Our parents generation were brain washed a bit into thinking that RRSP's were the best and only way to structure their savings! Now they may find themselves with a pile of registered money that has never been declared as income and therefore the tax man is knocking the door down!

So, if you are wondering about RRSP's and or you think you may need some tax write offs (we can discuss this concept as well) this year because your income was high or you moved up a tax bracket - please give me a call. I would be happy to clear this up for you and give you some tax planning ideas. I promise to make this as painless as possible, and well you know me - I will make you laugh in the process :)

Because hey - no one likes to pay tax! Am I right or am I right?

To see your tax payable and also to an RRSP contribution calculator you can visit - http://www.ey.com/CA/en/Services/Tax/Tax-Calculators