Can an Investment Help You With Income Taxes? | Michelle Levesque

February 24, 2022

This post is presented by Financial Advisor, Michelle Levesque

It’s almost income tax time! Some dread it if owing the government taxes. Some look forward to it if getting money back.

Can contributing to an investment help you during this time? The government offers two options for your money: RRSP or TFSA

1. RRSP (Registered Retirement Savings Plan)

RRSPs are best suited for those who owe the government at income tax time. The government gives you a tax break for contributing to an RRSP. Essentially they are giving you your taxes back on the money contributed. Then when you take it out as an income during retirement they will take those taxes back. The amount you get back is based on your tax rate.

RRSPs are not necessarily a good fit for everyone. You may lose money to taxes contributing to an RRSP if you earn more later in life than you did when you put money in. If you have a good employer pension RRSPs may not be advisable.

Example:

Jane makes $50,000 yearly. She puts $1000 into an RRSP. The government gives her $353 back (tax she would have paid). If she owed the government $353 in extra taxes, contributing $1000 to her RRSP would offset that so she does no longer owe.

30 years later Jane is ready to retire…

Scenario A: Her income is now $90,000 yearly. If she withdraws the same $1000 she will owe the government $370 in taxes since her tax rate is higher. So RRSPs did not benefit her since she is paying more tax withdrawing than she got as a break contributing.

Scenario B: Her income is now $30,000 yearly. If she withdraws the same $1000 she will owe the government $277 in taxes since her tax rate is lower. So RRSPs did benefit her since she is paying less tax withdrawing.

Many will try to withdraw a smaller income during retirement from investments so they are taxed lower. This is why if you have a pension it may be advisable to have less in an RRSP and more in a TFSA….so you have somewhere else to take retirement income from that will not add to your income along with your pension, causing you to be in higher tax bracket.

If you want to make sure your RRSP contribution applies to your 2020 taxes you must have it made before March 2, 2021. There is a deadline each year.

2. TFSA (Tax Free Savings Account)

TFSAs are a good place to put your tax refund if you get money back! The government has given us all the opportunity to make tax free growth in our investments. Take advantage!

Example:

Jane contributes $10,000 to her TFSA and it grows to $12,000…that’s $2000 of income you never have to pay tax on! TFSAs are not tied to your income at all. They do not offer a tax break. The major incentive is earning growth you never pay tax on. Many people I meet with have TFSA’s set up, but they aren’t invested properly. If the government is allowing us tax free growth make sure it is growing!

Talk to an advisor. My job is to take the guesswork away from clients. It can have a huge impact on what you keep during retirement versus how much the government gets.

I would love to hear from you! Check out my Facebook page and feel free to send a message-

Until next time!

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I have been guiding individuals and business owners financially since 2008. I chose to represent Front Gate Financial Group, a local brokerage, which offers every bank and insurance company. I do not believe in being biased or product pushing for one particular company since all companies can have competitive products at any given time. I review each individual’s entire financial circumstance, educate, then shop the market for the best in all areas. You deal with one person you trust and know you have the best in all areas.

My favourite part of being a Financial Advisor is educating and empowering people financially. There’s nothing better than having a new client tell me they are no longer overwhelmed and confused by their finances and are excited by the game plan we have put in place to budget, pay down debts, protect their family, and reach their goal of retiring comfortably.

Over the years I have been asked to give financial education presentations at numerous groups and events including: Fredericton Area Women’s Business Network, International Women’s Day, Mom Talk NB, the Oromocto Chamber of Commerce, Fredericton Regional Family Resource Centre, Military Family Resource Centre, Wedding Shows, Facebook groups. I am currently the Financial Pro for Mom Talk NB providing monthly articles and live discussions.

I am married, have a little fur baby and a beautiful daughter. I enjoy travelling with my husband, painting, scuba diving, snowboarding, yoga, and walking my pup. Quality time with family and friends is everything!

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