## Pay Taxes or Your RRSP ?

in Income Tax, RRSP, T4

Given my love for the RRSP (or the Tax Deferral Savings Plan), I was wondering whether folks use it to defer owed taxes? The simple question is Pay Taxes or Your RRSP ?

If you received my T4 early enough that you could estimate my taxes, what would you do if you estimated you owed \$500 taxes?

You have two options:

1. Give the CRA their \$500 and forget about it
2. Put enough money into your RRSP (before March 1st) to counteract the owed taxes. This means you would then owe \$0 in taxes.

The argument I keep hearing is that if I put money away in an RRSP now, I’ll just end up paying a higher tax rate on it when I take the money out. There is a school of thought that you might be in a higher tax bracket when you retire. To me, it seems an odd statement given the money will grow (hopefully) in your RRSP. This mean you’ll have more money to be taxed, albeit at a higher rate ?

I tried very hard to find what your nominal tax rate might be in Ontario, but let’s just assume it’s 50% for you.

This means you need to put about \$750 into your RRSP to not pay \$500 in taxes to the CRA. To do this exercise, if you have Quicktax or something similar, you can simply plug numbers into their RRSP estimator. This might be a better way to estimate, how much to pay.

Now you have \$750 in your RRSP, and say you are 32. You have about 30 years until you want to take your \$750 out. Assuming a simple growth 4.5% year over year, it will be about \$3100.

## Why not Put It in an RRSP ?

You now take \$3100 out at a higher tax rate (say 60% again hopefully taxes in 32 years are not that brutally high), but it is still about \$1300 dollars net. The bonus is you didn’t have to pay the CRA \$500 32 years ago (an added bonus).

A net investment of \$250 (you were going to have to spend \$500 no matter what) you end up with \$800 ? Seems like a winner to me.

Why wouldn’t you do this? If you didn’t have \$750 dollars I suppose that might stop you, but are there other reasons?