You may already know that a RRSP is a powerful accelerator for financial growth. The tax advantages it offers make it possible to invest ever-increasing amounts without additional effort, by systematically reinvesting tax refunds in your RRSP.
What if you used your RRSP to take advantage of other registered accounts such as the TFSA or FHSA without any additional savings effort? With discipline and a good understanding of taxes, it can be done.
80% of your TFSA with your RRSP
An important feature of RRSPs is that contributions reduce taxable income and, consequently, tax payable. Let’s take the example of a mid-career engineering professional contributing 10% of gross income to the RRSP.
- Income: $123,314, the engineering industry’s average annual income according to a recent survey by Genium360
- Combined marginal tax rate: 45.71%
- Amount of contribution: $12,331
This contribution reduces taxable income to $110,983. Without even realizing it, this tax deduction even allows a change in tax brackets to 41.12%. Result:
$5,602 in tax savings*
This is a significant amount! With this tax refund, it is possible to contribute up to 80% of the $7,000 annual TFSA limit (2024) or up to 70% of the $8,000 annual FHSA contribution limit. That’s even more than the $5,000 needed to get the maximum RESP grants for two children!
From RRSP to FHSA for more deductions
Another enticing option would be to use your RRSP tax refund to contribute to an FHSA. The tax impact is growing. Why? As with RRSPs, FHSA contributions also reduce taxable income. You guessed it! By adding the tax refund to your regular savings in an account like an RRSP or FHSA, you could receive an even larger tax refund the following year. Let’s take the case of our engineering professional earning $123,314. On top of the 10% annual savings, there’s the $5,602 tax refund, for a total of $17,933. This is split between the FHSA and RRSP so that the FHSA annual limit is fully utilized.
- FHSA contribution: $8,000
- RRSP contribution: $9,933
- Taxable income: $105,381
$7,905 in tax savings
Just $95 short of the FHSA annual limit! As long as there is space in the FHSA, this mechanism can be applied year after year and the tax refunds will keep growing.
What should be done once the FHSA is maxed out? Contributing to the TFSA or keeping the snowball rolling in the RRSP if there is still unused contribution room are both great options.
Awesome! But is this the best strategy for me?
Making full use of the investment accounts available to you can help you achieve financial independence. Tax refunds are attractive new sources of savings for investors determined to grow their wealth. Even with a salary of $68,000, the average income of a young engineering graduate at the start of his or her career, there is a considerable effect. At this income level, the tax refund is $2,456 on a 10% RRSP and/or FHSA contribution.
However, while taxes are an important element, there are other crucial factors to consider. Your personal and financial situation, as well as your objectives, are essential aspects of your strategy. For example, if you need liquidity, prioritizing the TFSA over other accounts may be the best option. If you have children, you may prefer to put your efforts into an RESP. To invest effectively according to your needs and objectives, being supported is an advantage.
Contact the Advisory team
FÉRIQUE Investment Services, principal distributor of the FÉRIQUE Funds, provides support at no additional cost to engineering professionals and their families investing in FÉRIQUE Funds.
