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RRSP & TFSA Guidelines and How Nurses Can Reduce their Taxes!

Updated: Mar 1, 2022

It’s beginning to look at lot like tax season again!



I'm a bit of a weirdo and actually look forward to tax season because I always get a refund which I think is partly due to my RRSP contributions and partly due to Charitable Donations. I should actually feel the opposite way and feel better owing money to the government, because when I receive a refund it means that they have been hanging onto my money interest free for the past year. But sometimes it's a nice forced savings plan in one larger sum. Whatever works best for you individually. If it is easier to budget and set aside money each month or pay more in taxes and get a larger lump sum refund and then put that directly into your savings. Hopefully the point is that you are able to both budget and save.



Warning: if you have consumer debt or student loan repayments, please consider redirecting your extra money towards paying those in full before considering investing because they likely have higher interest rates that what you would be earning on your investments. Also, mentally it is easier to concentrate on paying debts first and then investments second, with the exception of having an Employer Matching Program. Consider, that the interest accumulating as a penalty on your debts is guaranteed interest immediately whereas the interest earned on investments is not guaranteed.


First RRSPs:

We will discuss how RRSPs can reduce your taxes this season.

The deadline to contribute is March 1, 2022.




If you contribute before this deadline, you can reduce your taxes paid in 2021 and thereby potentially get an increased refund.


However, there are some guidelines that you have to keep in mind:



So, let's say for example that you are an Albertan nurse working full time and made approximately $110,000 in 2021, your maximum RRSP contribution amount could be $27,830 (which is 25% vs 18%) to invest within an RRSP investment vehicle for 2022. However, because you are a nurse with a Pension Plan, it may actually be less than $27,830 because of a Pension Adjustment. The best place to know the exact amount for your personal amount is to look at your previous tax year's Notice of Assessment. Keep in mind, if you do not contribute to your RRSPs, that contribution room amount can keep accumulating over the years to a larger number.

Just for interest's sake I have included the




Plus Provincial Tax for us Albertans



Since we don't don't necessarily know the pension adjustment formula, let's say for example that this same nurse contributed 15% ($16,500) in an RRSP. This would lower his/her Federal tax bracket from 26% down to 20.5% (because their income would be $93,500 instead of $110,000).

So this could potentially mean paying Federal taxes of

$7,529 (for the first $50,195 at 15%)

+ $8,877 (for the next $43,303 at 20.5%)


Instead of an additional $1,412 (on the $93,500-100,392 at 20.5%)

plus $2,498 (on the last $9,608 at 26%).


Thereby saving the nurse $3,910 in federal taxes.


Additionally, this nurse still has to pay the:

10% provincial tax of $11,000 (10% of $110,000).

However the provincial tax are reduced to $9,350 (10% of $93,500) since they invested $16,500 in RRSPs.

Saving $1,650 in provincial taxes,

for a total of $5,560 in both federal and provincial taxes.


Also, this nurse now has the additional $16,500 invested to hopefully start making gains via compound interest for the future. Remember that this nurse will have to pay taxes on this $16,500 + the compound interest earned when this nurses withdraws the funds from the RRSP in retirement. The taxes in the future will vary depending on how much compound interest is earned and when the nurse decides to withdraw the funds and in what kind of increments.


Did you know?

If you have a Pension Plan than your RRSP contribution room is also adjusted by your employer. Make sure that you look at your T4 slip! There are so many factors at play so it is best to look at your Notice of Assessment for the accurate amount.




Secondly, another way to reduce your taxes is:


Charitable Donations:

Did you know that by donating to charities, that you can reduce your taxes as well. There was a charitable tax law change in 2017 and the rates seemed to have stayed the same since. Also, this is a non-refundable tax credit. As such, it can only be used to reduce tax owed; if you don't owe any tax, you don't get a refund.


(https://www.canada.ca/en/revenue-agency/services/charities-giving/giving-charity-information-donors/claiming-charitable-tax-credits/charitable-donation-tax-credit-rates.html)



Here is an example of what a charitable donations looks like in tax credits for someone who has an income of less than $200,000.


Continuing with our example of our nurse, if our nurse donated $8,000 (rough estimate of 10% of their take home pay) in Charitable Donations, this could provide,

Federal Tax credits of : $30 (15% on the first $200)

+ $2,262 (29% on the remaining $7,800)

= $2,292

Provincial Tax credits of: $20 (10% on the first $200)

+ $1,638 (21% on the remaining $7,800)

= $1658

for a total of $3,930 in total Charitable tax credits.


Total tax credits:

RRSP tax credits of $5,560

+ Charitable Donations tax credits of $3,930

= potential Tax Refund of $9,490!




Canadian Generosity:

"A new study by Vancouver’s Fraser Institute suggests Canadians aren’t donating to charities like they used to.
The study released Thursday found Canadians donated 0.54 per cent of their income in 2017, the most recent year of available tax data.
Comparatively, Americans donated nearly three times that amount at 1.25 per cent.
The Fraser Institute calls it the lowest amount Canadians have donated since at least the year 2000."

If this same nurse had only donated 0.54% ($432) of his/her net income instead of 10% ($8,000), it would obviously have resulted in less charitable tax credits to the tune of $166 versus $3,930. Resulting in a tax credit total of 49% versus 38%. It does mean giving some of your money to a worthy cause but isn't that worth it?




Will you consider donating more this year?

&

What are you passionate about supporting?

&

Which charities provide that level of support?



And then take it one step further and re-donate your charitable tax refund, the following year!




Did you Know?

That if you withdraw your RRSP early before Retirement that there are withdrawal fees?



Now let's discuss a TFSA


Let's continue with this same nurse, by using a TFSA investment vehicle this nurse would not have a reduction in their taxes for 2021. However once this nurse decided to withdraw the money invested in this TFSA plus the compound interest earned, thankfully, there will be no taxes on this money in the future. There is however a limit on how much can be invested in a TFSA each year. Again, the best way to know how much individual room you have, is to reference your own Notice of Assessment from 2021 for 2022.


The TFSA is similar to the RRSP in the sense that IF you do NOT contribute to it, the contribution room keeps accumulating. Therefore, if you were 18 years old in 2009, when the TFSA was first introduced and you had never contributed to your TFSA, you would have room to contribute $81,500 in 2022. Also if you withdraw funds from your TFSA there is no penalty and you regain your contribution room, the following year.





I don't think that one investment vehicle is better than the other but instead, it is up to each individual's situation. If you could fully contribute and max out both your RRSP and TFSA each year that would be awesome! or if you could work towards doing that as your goal, awesome!


This information is just to assist you in making your individual decision.


Once you decide whether you will invest in either an RRSP, TFSA or both, you need to remember that these are only Investment Vehicles and you need to decide what to fill these vehicles with whether that will be stocks, bonds, cash, mutual funds, ETFS etc.

Check out this video for the next step after you have set up your RRSP or TFSA:




As long as you are making progress towards your financial goals, that's the main thing!


Now Go and Be Intentional!

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