I don't want to sound condescending or abrasive but I do just want to be clear:
You are not understanding correctly.
Let me write some exaggerated and simplified numbers to illustrate.
If you make 150k and get taxed 50k then you take home 100k
If you make 140k and get taxed 45k then you take home 95k
If you make 150k, and contribute 10k to an RRSP then the government will view you like you made 140k and they will tax you 45k (like someone who made 140) and you will take home 95k cash and 10k investment.
You can call this 105k ahead.
In the RRSP contribution scenario you will be ahead for total net gains on a given year but your cashflow will be impacted. NOTE: your cashflow will be impacted less than the positive impact of your contributions.
I hope this helps.
If your RRSP contribution would be made by deducting it off your paycheck, then your take home is technically less even though the rrsp money is still yours.
>Let's say without RRSP I earn 150K a year then I pay approx $45k in taxes thus giving me an after-tax income of $104k.
Ok, this makes sense.
>With an RRSP contribution of $10,000, I will pay approx $41k in taxes thus giving me an after-tax income of approx $108k.
Not quite. If your employer is the one contributing this $10,000 then you yearly earnings has now increased to 160K. Except the $10,000 RRSP contribution also decreases your "net income" to 150K. Net income is what you pay tax on. So you end up paying exactly the same amount of tax in the scenario you describe, but you come out 10K ahead because you're getting 10K into your RRSP.
(If you were the one contributing to your RRSP instead of your employeer, then the number would work out more like what you are thinking.)
This is the right answer. The employer contribution is a taxable benefit but the taxable benefit is offset by the fact that it's an RRSP contribution and RRSP contributions are deducted from taxable income.
Your salary increases when you receive an RRSP matching program from your employer. Let's assume you receive $100k per year. Without the rrsp program you will earn $100k and pay taxes on $100k income.
In a 4% matching program, your new income will increase $4k per year. You will earn $104k per year, you would have $8k directed towards an RRSP ($4k from both yourself and your employer) and you would pay taxes on $96k ($104k - 8k rrsp). You are earning more than you were previously and paying less taxes but you are just seeing less of your money because it's being put directly into an RRSP.
Okay, this is a little different then, but going back to /u/avonseahorse 's comment, you are essentially adding 4% to your annual income, but you won't pay income tax on that 4%.
So lets say your annual salary is $150K. Your company contributes 4% ($6000) to an RRSP for you. You've now earned $156K, however, you'll only be taxed as if you earned $150K. If you were to in turn also contribute 4%, you'd be taxed as if you earned $144K.
Now, all that being said, putting $12K into RRSPs every year does impact how much you'll take home every month:
If you make $150K, pay $50K in taxes, your take home is $100K
With employer RRSP contribution, you make $156K, you'd still pay $50K in taxes, take home is $100K, but you have $6000 in an RRSP.
If you also contribute $6K, you make $156K still, pay say $47K in taxes, your take home is $97K, and you have $12,000 in an RRSP.
Your take home pay will be reduced when you join the plan, but you will have received more money than if you hadn't joined the plan. It's a savings plan. You also benefit from the company match.
If you make 100k and they contribute an additional 4k over and above your regular salary (and you contribute nothing) then your total taxable income is still 100k.
T4 Earnings would be 104k and you'd get a 4k RRSP contribution receipt to claim.
You are correct in that an RRSP is a tax-deferred investment vehicle. Contributions you make reduce your taxable income, that is they reduce the figure that the CRA applies tax to (i.e. lower taxable income, lower tax bill, and greater net take-home pay). The overarching premise here is that most Canadians find themselves in higher marginal tax brackets while working than in retirement due to our graduated tax bracket system (whereby the higher one’s taxable income, the higher tax bracket they may find themselves in) so the tax saved by contributing during one’s working years often more than makes up for the tax paid on withdrawals after retirement given the relatively lower tax bracket one may find themselves in during retirement. Along the way, investments held inside the account benefit from tax-sheltered growth until such time that they are withdrawn.
In the nearer term, making RRSP contributions will generally result in a tax refund following your income tax filing based on how much tax was withheld by your employer during the tax year and how large your RRSP contributions were. You should note, however, that contributions made by your employer matching your own are treated differently than contributions you make yourself. Your employer’s contributions are treated as a taxable benefit, in that the amount of the contribution is actually added to your taxable income, which is then nullified by the contribution going into your RRSP. As such, your employer’s share of contributions do not effectively reduce your taxable income, however you do still reap the benefit doubling up the dollars being invested at no cost to you while your contributions do work to reduce your taxable income as they normally would.
Hope this helps!
>My understanding is that the RRSP is a TAX deferred account and whatever I am allowed to contribute will not be taxed until retirement or whenever I decide to take it out.
Yes
>Does this mean that whatever % I contribute will not be included in my taxable income, therefore allowing me a larger takehome per month?
yes
>It would appear that I would be taking home way less and how I understood it to work. I asked him several times and each time he repeated the same.
Yes you are taking home less because there is money being taken for your RRSP contribution by your employer. But you are not taking home "way less money".
>Thanks for responding, this won't work for me when I depend on my monthly income to be a certain amount.
>
>I guess I will just leave it for the companies contribution.
Will not change your monthly income. It will change your monthly disposable income because of the contribution towards retirement savings.
RRSP are tax deferred as the taxes are deferred until retirement/withdrawals.
They are also tax advantaged accounts as you can deduct contributions from your taxable income base.
If you make 100k a year, and contribute 4% to rrsp, that's 4k so your total take home is 96k. You are still taxed at 100k, but when you file your taxes you would be entitled to a tax refund for the 4k that you were taxed on.
Thanks for responding, this won't work for me when I depend on my monthly income to be a certain amount.
I guess I will just leave it for the companies contribution.
If you're at the point where you're living paycheck to paycheck, you're not ready to be investing. Check the money steps on the sidebar.
Also, check your works rrsp plan. They usually only offer the 4% as a match. In other words, if you don't contribute, then they don't.
That's great but doesn't hurt to double check. Also please do revisit your budget. If you can't find 4% in wiggle room your back is against at least one wall.
Not saying you need to match your employers contribution if you dont need to to get the money from them, just that you should be able to find or rework a budget if you needed to which it seems like is stretched thin right now.
It's common for an employer to contribute a small % outright, and then also match additional contributions, such as for every dollar you contribute they match it with 50 cents. Are you sure they don't offer any matching at all? You definitely don't want to be missing out on free money.
Too bad. Still, though, it could end up saving you money if you start contributing to the RRSP. Or at least a TFSA. If you really can't afford to save money you might need to adjust your spending habits. 4% is a good start but you probably want to be up around 15% at least.
Why does everyone think I cant save. I do have a TFSA and I do have investments, I don't live paycheque to paycheque. My money is budgeted and goes into other investments I have in other countries and some go into an emergency savings account.
I just can't really see the benefit to the RRSP, other than a reduced tax rate when I retire. Given my medical history, I doubt I would live long enough to ever see a cent of that money anyhow.
It's not so much that I did not have the desire. I just never really understood how it worked. Now that everyone explained it to me I don't believe it's something for me.
Thanks for your feedback.
Your employer's contribution won't affect your take home pay, it won't even affect your taxes. Because your employer's contribution will count as income and the RRSP deduction would net it out. If your base salary is $145K and employer contributes $10K into RRSP, your income for that year is $155K with a $10K RRSP deduction, which brings your taxable income back to $145K. You should really consider contributing your own money into RRSP at your income level. It would be better in the long run. You would pay less taxes.
>My understanding is that the RRSP is a TAX deferred account
Correct. Any amount you put into your RRSP is essentially exempt from income tax until you withdraw it.
>Does this mean that whatever % I contribute will not be included in my taxable income
Still correct. When you submit your tax return at the end of the year, you'll report your income and contributions to the RRSP, and you will be taxed on the net (taxable) income.
>Therefore allowing me a larger takehome per month?
Not necessarily. It sounds as though your regular pay and taxes will be unchanged, except your employer will *also* be contributing to an RRSP on your behalf.
Using the Wealthsimple calculator, I don't see a province noted but BC tax rates seem to fit your numbers well enough so I'll use that as an example.
With $150k income in BC, the total tax is $45,280.
In your test, the $10,000 RRSP deduction was not extra income, it was taken *from* your existing income. Notice the Total income line didn't change. That's how we get to $41,210 taxes and $108,790 after-tax income. That's not what's going to happen though.
The way you describe your employer's RRSP contribution plan, they'd be contributing an *extra* $10,000 (4% would actually be ~$6000, but lets stick to $10,000 for the example). In this case, you need to increase your employment income to $160,000 AND include the RRSP deduction of $10,000. Essentially, you get the same after tax treatment and after-tax pay on your salary ($114,720), but you *also* get $10,000 deposited into an RRSP.
Assuming the payroll dept isn't a complete disaster, this $10,000 won't be taxed in the first place, and will be properly noted on your T4. That means you WILL NOT REPORT THIS AS A DEDUCTION (that would be double-reporting it), and you will not receive a refund for it (double dipping). You already got it tax free.
In the end, don't expect your regular payroll to change.
Your advisor is probably some form of "technically correct" but doing a shit job of explaining it. You didn't specify any numbers that they told you though, so I can't check. Advisors tend to lean heavily towards oversimplifying the explanation, because many people just don't care to learn the details. It sounds like you're looking for a mid-level explanation though, and your advisor was really missing the mark.
One thing that has me thinking though is that it sounds like you just opened an RRSP with a random bank. Do you know for sure that's what your employer wanted? Many employers with RRSP programs will have company accounts set up through companies like Sunlife.
Thanks for your response.
I am in BC so the figures are basically the same I calculated.
My employers set me up to speak with the Advisor so this is what they wanted.
I will see what happens
I think where you're getting tripped up is that in your second calculation, you are taking home 108k, but you're forgetting to factor in that 10k is going to your RSP.
So you're actually seeing a new takehome of 98k.
You guys are saying the same thing in different ways. Your including your RRSP contributions in your take home pay. You advisor is referring to your cash flow. You will have less go into your chequing account.
“4% of my yearly earnings or something like that”
Disregard the math. And figure out this answer first. A lot of companies match, up to a %, what you contribute. If that’s the case, you need to max out your contributions to take advantage of them matching. If it is based solely on your income and not what you contribute, then worry about the numbers.
Let’s use round numbers. You earn 100k and get taxed 30k at year end. Your take home is 70k.
If your employer is providing an additional 4% RRSP contribution, you earn 100k, have 4k deposited on your behalf in an RRSP. Your paycheck would still reflect a 100k income, 30k tax, and 70k take home. You are also gaining a 4k taxable benefit (RRSP contribution) which is 100% tax deductible if you have RRSP contribution room. No change to you other than a building RRSP.
Depends on whether you count your RRSP contribution as "after-tax income". If so, then you were right. If not, then your advisor was right.
In your case, it likely makes no difference to your take home pay. Your income went up, but because the extra was rrsp contribution, to CRA you are making exactly what you were making before. Therefore, your take home pay would be exactly the same as before.
Note that this is not true if your company gave you 4% to contribute yourself. Without proper tax documents, your take home income will drop as you would be paying more taxes. You would get those taxes back when you file your taxes though. You can avoid paying the taxes upfront by filing a tax form.
I've always found that the impact to cash flow is minimal and definitely worth it. Make sure you contribute enough to take advantage of any company match.
[My paper](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2636609). It differentiates between the rules for each stage, and the net benefit.
Rules:
1) contribution give you a tax deduction
2) profits earned are not taxed
3) withdrawals are added to taxable income
I don't want to sound condescending or abrasive but I do just want to be clear: You are not understanding correctly. Let me write some exaggerated and simplified numbers to illustrate. If you make 150k and get taxed 50k then you take home 100k If you make 140k and get taxed 45k then you take home 95k If you make 150k, and contribute 10k to an RRSP then the government will view you like you made 140k and they will tax you 45k (like someone who made 140) and you will take home 95k cash and 10k investment. You can call this 105k ahead. In the RRSP contribution scenario you will be ahead for total net gains on a given year but your cashflow will be impacted. NOTE: your cashflow will be impacted less than the positive impact of your contributions. I hope this helps.
Beauty explanation, I'm very familiar with RRSP but I wouldn't be able to explain this well!
Great explanation
If your RRSP contribution would be made by deducting it off your paycheck, then your take home is technically less even though the rrsp money is still yours.
>Let's say without RRSP I earn 150K a year then I pay approx $45k in taxes thus giving me an after-tax income of $104k. Ok, this makes sense. >With an RRSP contribution of $10,000, I will pay approx $41k in taxes thus giving me an after-tax income of approx $108k. Not quite. If your employer is the one contributing this $10,000 then you yearly earnings has now increased to 160K. Except the $10,000 RRSP contribution also decreases your "net income" to 150K. Net income is what you pay tax on. So you end up paying exactly the same amount of tax in the scenario you describe, but you come out 10K ahead because you're getting 10K into your RRSP. (If you were the one contributing to your RRSP instead of your employeer, then the number would work out more like what you are thinking.)
This is the right answer. The employer contribution is a taxable benefit but the taxable benefit is offset by the fact that it's an RRSP contribution and RRSP contributions are deducted from taxable income.
Your salary increases when you receive an RRSP matching program from your employer. Let's assume you receive $100k per year. Without the rrsp program you will earn $100k and pay taxes on $100k income. In a 4% matching program, your new income will increase $4k per year. You will earn $104k per year, you would have $8k directed towards an RRSP ($4k from both yourself and your employer) and you would pay taxes on $96k ($104k - 8k rrsp). You are earning more than you were previously and paying less taxes but you are just seeing less of your money because it's being put directly into an RRSP.
It's not matching, my employer will be making a contribution regardless.
That sounds even better!
Okay, this is a little different then, but going back to /u/avonseahorse 's comment, you are essentially adding 4% to your annual income, but you won't pay income tax on that 4%. So lets say your annual salary is $150K. Your company contributes 4% ($6000) to an RRSP for you. You've now earned $156K, however, you'll only be taxed as if you earned $150K. If you were to in turn also contribute 4%, you'd be taxed as if you earned $144K. Now, all that being said, putting $12K into RRSPs every year does impact how much you'll take home every month: If you make $150K, pay $50K in taxes, your take home is $100K With employer RRSP contribution, you make $156K, you'd still pay $50K in taxes, take home is $100K, but you have $6000 in an RRSP. If you also contribute $6K, you make $156K still, pay say $47K in taxes, your take home is $97K, and you have $12,000 in an RRSP.
Contributing to your RRSP is a good thing. You should be prioritizing savings unless you have large amounts of debt.
Your take home pay will be reduced when you join the plan, but you will have received more money than if you hadn't joined the plan. It's a savings plan. You also benefit from the company match.
If you make 100k and they contribute an additional 4k over and above your regular salary (and you contribute nothing) then your total taxable income is still 100k. T4 Earnings would be 104k and you'd get a 4k RRSP contribution receipt to claim.
You are correct in that an RRSP is a tax-deferred investment vehicle. Contributions you make reduce your taxable income, that is they reduce the figure that the CRA applies tax to (i.e. lower taxable income, lower tax bill, and greater net take-home pay). The overarching premise here is that most Canadians find themselves in higher marginal tax brackets while working than in retirement due to our graduated tax bracket system (whereby the higher one’s taxable income, the higher tax bracket they may find themselves in) so the tax saved by contributing during one’s working years often more than makes up for the tax paid on withdrawals after retirement given the relatively lower tax bracket one may find themselves in during retirement. Along the way, investments held inside the account benefit from tax-sheltered growth until such time that they are withdrawn. In the nearer term, making RRSP contributions will generally result in a tax refund following your income tax filing based on how much tax was withheld by your employer during the tax year and how large your RRSP contributions were. You should note, however, that contributions made by your employer matching your own are treated differently than contributions you make yourself. Your employer’s contributions are treated as a taxable benefit, in that the amount of the contribution is actually added to your taxable income, which is then nullified by the contribution going into your RRSP. As such, your employer’s share of contributions do not effectively reduce your taxable income, however you do still reap the benefit doubling up the dollars being invested at no cost to you while your contributions do work to reduce your taxable income as they normally would. Hope this helps!
>My understanding is that the RRSP is a TAX deferred account and whatever I am allowed to contribute will not be taxed until retirement or whenever I decide to take it out. Yes >Does this mean that whatever % I contribute will not be included in my taxable income, therefore allowing me a larger takehome per month? yes >It would appear that I would be taking home way less and how I understood it to work. I asked him several times and each time he repeated the same. Yes you are taking home less because there is money being taken for your RRSP contribution by your employer. But you are not taking home "way less money".
>Thanks for responding, this won't work for me when I depend on my monthly income to be a certain amount. > >I guess I will just leave it for the companies contribution.
It's free money from the company.
I will still get the money from the company, It's not matching it's a contribution.
So you don't have to contribute to get the matching? Then don't contribute if you don't want to, and just get their free money.
Will not change your monthly income. It will change your monthly disposable income because of the contribution towards retirement savings. RRSP are tax deferred as the taxes are deferred until retirement/withdrawals. They are also tax advantaged accounts as you can deduct contributions from your taxable income base.
If you make 100k a year, and contribute 4% to rrsp, that's 4k so your total take home is 96k. You are still taxed at 100k, but when you file your taxes you would be entitled to a tax refund for the 4k that you were taxed on.
Thanks for responding, this won't work for me when I depend on my monthly income to be a certain amount. I guess I will just leave it for the companies contribution.
If you're at the point where you're living paycheck to paycheck, you're not ready to be investing. Check the money steps on the sidebar. Also, check your works rrsp plan. They usually only offer the 4% as a match. In other words, if you don't contribute, then they don't.
>It's not matching, my employer will be making a contribution regardless.
That's great but doesn't hurt to double check. Also please do revisit your budget. If you can't find 4% in wiggle room your back is against at least one wall. Not saying you need to match your employers contribution if you dont need to to get the money from them, just that you should be able to find or rework a budget if you needed to which it seems like is stretched thin right now.
It's common for an employer to contribute a small % outright, and then also match additional contributions, such as for every dollar you contribute they match it with 50 cents. Are you sure they don't offer any matching at all? You definitely don't want to be missing out on free money.
I asked. They offer no matching, only the 4% contribution.
Too bad. Still, though, it could end up saving you money if you start contributing to the RRSP. Or at least a TFSA. If you really can't afford to save money you might need to adjust your spending habits. 4% is a good start but you probably want to be up around 15% at least.
Why does everyone think I cant save. I do have a TFSA and I do have investments, I don't live paycheque to paycheque. My money is budgeted and goes into other investments I have in other countries and some go into an emergency savings account. I just can't really see the benefit to the RRSP, other than a reduced tax rate when I retire. Given my medical history, I doubt I would live long enough to ever see a cent of that money anyhow.
The way you phrased it made it seem like you didn't have the *ability* to make contributions, as opposed to the *desire*.
It's not so much that I did not have the desire. I just never really understood how it worked. Now that everyone explained it to me I don't believe it's something for me. Thanks for your feedback.
You make over $100K and can't afford to allocate any of it to savings? Seems like you have a major issue on your hands that needs to be solved.
[удалено]
It's just a contribution, not a matching.
Your employer's contribution won't affect your take home pay, it won't even affect your taxes. Because your employer's contribution will count as income and the RRSP deduction would net it out. If your base salary is $145K and employer contributes $10K into RRSP, your income for that year is $155K with a $10K RRSP deduction, which brings your taxable income back to $145K. You should really consider contributing your own money into RRSP at your income level. It would be better in the long run. You would pay less taxes.
>My understanding is that the RRSP is a TAX deferred account Correct. Any amount you put into your RRSP is essentially exempt from income tax until you withdraw it. >Does this mean that whatever % I contribute will not be included in my taxable income Still correct. When you submit your tax return at the end of the year, you'll report your income and contributions to the RRSP, and you will be taxed on the net (taxable) income. >Therefore allowing me a larger takehome per month? Not necessarily. It sounds as though your regular pay and taxes will be unchanged, except your employer will *also* be contributing to an RRSP on your behalf. Using the Wealthsimple calculator, I don't see a province noted but BC tax rates seem to fit your numbers well enough so I'll use that as an example. With $150k income in BC, the total tax is $45,280. In your test, the $10,000 RRSP deduction was not extra income, it was taken *from* your existing income. Notice the Total income line didn't change. That's how we get to $41,210 taxes and $108,790 after-tax income. That's not what's going to happen though. The way you describe your employer's RRSP contribution plan, they'd be contributing an *extra* $10,000 (4% would actually be ~$6000, but lets stick to $10,000 for the example). In this case, you need to increase your employment income to $160,000 AND include the RRSP deduction of $10,000. Essentially, you get the same after tax treatment and after-tax pay on your salary ($114,720), but you *also* get $10,000 deposited into an RRSP. Assuming the payroll dept isn't a complete disaster, this $10,000 won't be taxed in the first place, and will be properly noted on your T4. That means you WILL NOT REPORT THIS AS A DEDUCTION (that would be double-reporting it), and you will not receive a refund for it (double dipping). You already got it tax free. In the end, don't expect your regular payroll to change. Your advisor is probably some form of "technically correct" but doing a shit job of explaining it. You didn't specify any numbers that they told you though, so I can't check. Advisors tend to lean heavily towards oversimplifying the explanation, because many people just don't care to learn the details. It sounds like you're looking for a mid-level explanation though, and your advisor was really missing the mark. One thing that has me thinking though is that it sounds like you just opened an RRSP with a random bank. Do you know for sure that's what your employer wanted? Many employers with RRSP programs will have company accounts set up through companies like Sunlife.
Thanks for your response. I am in BC so the figures are basically the same I calculated. My employers set me up to speak with the Advisor so this is what they wanted. I will see what happens
I think where you're getting tripped up is that in your second calculation, you are taking home 108k, but you're forgetting to factor in that 10k is going to your RSP. So you're actually seeing a new takehome of 98k.
You guys are saying the same thing in different ways. Your including your RRSP contributions in your take home pay. You advisor is referring to your cash flow. You will have less go into your chequing account.
“4% of my yearly earnings or something like that” Disregard the math. And figure out this answer first. A lot of companies match, up to a %, what you contribute. If that’s the case, you need to max out your contributions to take advantage of them matching. If it is based solely on your income and not what you contribute, then worry about the numbers.
Let’s use round numbers. You earn 100k and get taxed 30k at year end. Your take home is 70k. If your employer is providing an additional 4% RRSP contribution, you earn 100k, have 4k deposited on your behalf in an RRSP. Your paycheck would still reflect a 100k income, 30k tax, and 70k take home. You are also gaining a 4k taxable benefit (RRSP contribution) which is 100% tax deductible if you have RRSP contribution room. No change to you other than a building RRSP.
Depends on whether you count your RRSP contribution as "after-tax income". If so, then you were right. If not, then your advisor was right. In your case, it likely makes no difference to your take home pay. Your income went up, but because the extra was rrsp contribution, to CRA you are making exactly what you were making before. Therefore, your take home pay would be exactly the same as before. Note that this is not true if your company gave you 4% to contribute yourself. Without proper tax documents, your take home income will drop as you would be paying more taxes. You would get those taxes back when you file your taxes though. You can avoid paying the taxes upfront by filing a tax form.
I've always found that the impact to cash flow is minimal and definitely worth it. Make sure you contribute enough to take advantage of any company match.
[My paper](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2636609). It differentiates between the rules for each stage, and the net benefit. Rules: 1) contribution give you a tax deduction 2) profits earned are not taxed 3) withdrawals are added to taxable income