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RRSP Explained for BEGINNERS (EVERYTHING YOU NEED TO KNOW)

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what's up you guys welcome to the video

my name is Brandon and in today's video

we're gonna be talking about how you can

save money on taxes by using your RRSP

if you have no idea what an RRSP is you

come to the right place

stick around and even if you do know

what the RRSP is it never hurts to

reinforce what you know especially when

it comes to taxes and registered

investments because it can be quite

confusing so in this video we're gonna

start from the ground up

we're gonna start from the ground and

work our way up we'll talk about what

the RRSP is how it works and then how

you can use it to save money on taxes so

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place trades but let's start this video

off we'll start here at the basics

what does our RSP stand for and the RSP

stands for the registered retirement

savings plan I know the name kind of

says savings plan you may be thinking

it's like a savings account maybe like a

high-interest savings account of some

sort but the RRSP is actually an

investment account so very similar to

the TFSA to a cash account it's just one

of the options that you have and each of

these investment accounts have their own

characteristics they're all unique in

their own way but one of the major

benefits to using an RRSP is that it's

what we would call a tax sheltered plan

meaning that any income that you earn

within the RRSP you don't have to pay

taxes on and that's why you'll commonly

hear people say like it's a tax-free

account because it's actually sheltered

from tax and to explain what I mean by

this let's use the example of coca-cola

okay you own one share of coca-cola and

the prices are not right for this but

let's just assume here you own a share

of coca-cola and it goes up in value and

let's assume that you've made $100 on

that stock alright so it's grown by $100

if you go out

and sell that stock you've earned

yourself a $100 capital gain so that's

what it's called when the the share

price increases in value it's called a

capital gain now if this stock was held

in a cash account or in a margin account

or what we would call a non-registered

account so like an on sheltered plan you

have to pay taxes on that and the way

that it works is you would take 50% of

that gain so in this case $50 and that

$50 would have to be included and you'd

have to pay tax on that at the end of

the year now if you held that exact same

share of coca-cola in your RRSP all

right so the same stock it made the same

gain but instead of holding it in a

non-registered plan or non-registered

account I should say you held that in

your registered account your RSP which

is tax sheltered that entire hundred

dollars is gonna stay within the plan

and you don't have to pay any taxes on

that and this goes for any income that

you earn within this accounts capital

gains dividends from your stocks

interest that you're receiving from

bonds all of that is kind of free from

tax that's what we mean when we say a

tax sheltered plan so you can see

already just how valuable that is when

you think about all the money that

you're gonna be saving in taxes that

just gives you more capital or more

money to invest and compound over time

now on top of being a tax sheltered plan

which is amazing as is the RSP is very

unique in that it's a means of deferring

tax as well meaning we're not gonna pay

tax now but we're gonna defer it we're

gonna push it back and pay those taxes

later and how this is done is that the

amount of money that you contribute to

your RRSP that amount can be deducted

from your taxable income I know that

probably doesn't make a whole lot of

sense but we will go over an example in

just a second but before we go into that

example we have to understand how taxes

work so for anybody that works here in

Canada if you have a job and you're

making money well you have to pay income

tax on that right the government's going

to get a chunk of what you're earning

now what happens is the CRA so the

Canadian Revenue Agency they're the

people in charge of taxes

what they do is they essentially

estimate based on you know your age

where you live like what province you

live in you know maybe they say Joe for

example works 40 hours a week making

this much per hour

they estimate how much money you're

gonna be owing in taxes throughout the

year now rather than taking that money

all out at once just saying at the end

of the year you know you owe this big

chunk of money in taxes because the

reality is like most people don't have

the discipline to put that money aside

we'd all probably just go out and spend

it what the CRA does is that each

paycheck you receive they withhold a

little bit and you've probably seen at

the bottom of your pay stub you have the

deductions like withholding tax CPP

contributions AI and that's why looking

at your paycheck you have your gross

income but after the deductions after

the tax and whatnot you actually end up

netting less so basically what happens

is that throughout the course of the

year each paycheck they're taking a

little bit a little bit off and that

should add up to the amount that they

estimated the amount that you should be

owing in taxes now if they took too much

which happens they're usually pretty

close but if they took too much you're

gonna get that difference back via your

tax refund on the same token if they

didn't take off enough tax well you'd

actually be owing so that's kind of how

the tax system works and that's

important to understand when it comes to

the RRSP contributions now how does your

RRSP come into play here well like I

said contributions to your RRSP can be

deducted from your taxable income so

looking at the example here of Joe let's

assume that he's making $40,000 a year

and if he gets taxed at approximately

20% that means that he owes the

government $8,000 in income tax now

again each paycheck they'll be taking a

little bit a little bit and it should

add up to $8,000 through the course of

the year now if Joe makes a $5,000

contribution to his RSP he can deduct

that amount from his taxable income he

doesn't need to buy stocks he doesn't

need to make any investments he can

literally just pop the money into that

account

it can be sitting there in cash and that

will count as a contribution so he did

ducks $5,000 from his taxable income and

his new taxable income in the eyes of

the CRA is now $35,000 so when the

government wants to come and take their

20% well he now only owes $7,000 in

taxes but again throughout the year

they've been deducting about 8,000 so at

the end of the year he's gonna get this

difference back in this case $1,000 on

his tax refund so simply by putting

money into your RSP the government

rewards you by saying hey you can save

some money on taxes now there is a

caveat to this you're not just not

paying taxes remember you're deferring

these taxes so when you take money out

of your RRSP you have to know you have

to include that amount in your taxable

income for that year and the reasoning

behind that the whole idea behind

deferring these taxes is that during

your high income years during the years

that you're working hard and you're

likely going to be in a higher tax

bracket you can use the RSP you can save

money on taxes that gives you more money

to invest and then ideally you know

years down the road when you're in

retirement which you know you should be

in a much lower tax bracket that's when

you start peeling the money out and

hopefully you're paying a much lower

amount in taxes now to finish off this

video there are a few important things

that I want to touch on when it comes to

using an RRSP these are gonna be in no

particular order but these are things

that probably should be covered in this

video the first is that you can take

money out of your RSP whenever you want

okay you're not locked in but you have

to start taking money out in the year

that you turn 71 in that year your RSP

is going to be converted into what's

called a RIF a registered Retirement

Income Fund and there's gonna be a

minimum amount that you have to start

taking out so eventually you are gonna

have to start paying taxes on these now

there is another circumstance where you

can take money out of your RSP and this

is through what's called the homebuyers

plan and the homebuyers plan you know if

you're looking to go out and buy or even

build a house you are eligible to

withdraw up to $25,000 from your RSP and

this withdraw can be done tax-free now

this has to be a qualified house has to

be located in Canada I believe it has to

be your primary residence I will include

this link down in the description below

if you do want to take a look over it

but basically by taking that money out

you have up to 15 years to repay that

amount so you're essentially taking a

loan out from yourself from your RSP

account assuming that you're willing to

pay it back another thing is that our

rsps do have contribution limits okay

you can't just put as much money and

just pile as much money as you want into

these accounts otherwise people would

and the limit is set at 18% of the

previous year's income so if in 2018 for

example you made $100,000 well in 2019

the amount of space that you have

available would be $18,000 now if you

don't use up the full space that's

completely fine it's cumulative so each

year the space that you don't use is

just gonna Crewe and yours can be

building up more and more space and if

you are curious to check out what your

personal limit is or what how much how

much contribution space you have

available you can check that on the

bottom of your notice of assessment

there should be a line that says RSP

contribution limit or available

contribution space something along the

lines of that or you can log on to see

our A's website it's called CRA my

accounts and technically just a fun

little fact here you can actually over

contribute to your RSP by two thousand

dollars without paying a penalty so if

you had let's say 18 thousand dollars

worth of room technically you could put

up to $20,000 without getting in trouble

there but if you were a dollar over

which you don't want to find yourself in

that situation you are gonna pay a

penalty of 1% per month until you get

that fixed so that does give you a

little bit of wiggle room it's just

something to keep in mind as you make

your contributions but definitely you

definitely not want to be pushed

it because you don't want to find

yourself in that situation of over

contributing and also I forgot to

mention there is a maximum amount that

you can contribute if you're making a

high income if you're making a few

hundred thousand dollars the maximum

that you can put in in 2019 is somewhere

along the lines of twenty six thousand

five hundred dollars now there's two

more things that I want to talk about

here to finish off this video I don't

mean to like overcrowd you guys with

information but it is important stuff to

know if you contribute to a pension plan

to a registered pension plan like

through work that does actually cut into

your RRSP contributions space they don't

want you double dipping they don't want

you putting eighteen percent in your RSP

but as well have money accruing in in

your registered pension plan it's gonna

be capped out at eighteen percent as a

combination of both so that is something

that you want to double check if you

find yourself in this situation you

definitely don't want to be over

contributing because you have a pension

plan running through work

lastly last but not least this is an

important one when you take money out of

your RSP you don't get that contribution

space back so that's kind of like unlike

the TFSA with the TFSA if you take money

out the next calendar year you're able

to put that back in with the RSP once

you take money out that's gone you could

kiss that space goodbye so again just

something to keep in mind oh yeah and

one more thing this was a question that

I got a lot on the previous video so

I'll just clarify it now your

contribution space is based on your

deposits if you have ten thousand

dollars worth of room and you deposit

five thousand dollars if those

investments grow to ten thousand if they

grow to a hundred thousand it doesn't

matter you're still gonna have in this

case five thousand dollars worth of

space left it's not about the growth or

the size of your portfolio your

contribution space is determined by the

amount of deposits that you make so guys

that's my video here on RRSPs in summary

the RSP is a really great account it's

an awesome account to take advantage of

I was put in place by the Canadian

government to promote and encourage

people to go out and invest for the

retirements it's especially useful for

somebody that finds their self in a

higher tax bracket if you're in the bulk

of your working years you can really

benefit from saving taxes while you're

paying them at a higher rates I

personally have both an RSP and a TFSA

it really just comes down to your

personal circumstances what you decide

to go with if you guys do you want me to

do a video similar to this but on the

TFSA which is another great option here

for in for Canadians leave a comment

down below because I can very easily do

that but as always if you enjoyed the

video give it a thumbs up if you have

any questions leave a comment down below

I do the best I can to answer all the

questions here like I said if you're not

already subscribed guys subscribe to the

channel I post a video every Monday gung

hay fat choy to all of my Chinese

viewers out there it's the year of the

pig this year which is actually I think

the year I was born

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individual stocks but as always I thank

you guys for watching I hope you enjoyed

and I'll see you in the next video

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