Defer Tax By Using 401k (USA) or RSP (Canada)

MARCH 13, 2017

Using a Tax Defer Scheme to Save Some Money

Don’t you just hate it when you have worked all that over time then you have to fork over a portion of it to the government by way of taxes? There is a way around this, and if you utilize it then you can set yourself up to have a solid financial future. What it means is knowing how to use your 401 K if you live in the US, or the RSPs as a Canadian resident.

So What is Tax Deferment?

Deferring taxes means that you don’t have to pay the tax you normally would on income that has put you in a high tax bracket. Yes, it is true that tax money does pay for many of the public conveniences you enjoy. Don’t feel bad though, because eventually you will be paying the taxes on this money, but at a time when it is more convenient to you.

How is This Done?

The Government really wants people to save for their retirement years, so that seniors won’t be such a burden on the government. In addition to this, the government knows that you will invest your saved money and over the years it will grow and you will need to pay taxes on the entire money and not only for the deposited funds. Bottom line is you get more and then the government gets more. For this reason, the US has set up a 401K program and Canada offers the RSP program. This means that you are allowed to deposit a specific amount of your money into these programs each year without having to pay the taxes on it first.

For example, let’s say that as a Canadian resident you made $70,000 this year. The government has determined that you can put $10,000 into an RRSP account. So now instead of paying taxes on the $70,000. You are only going to have pay current taxes owed on $60,000 as long as you deposited the $10,000 in RSP program.

Money Making Money

The money that is sitting in your 401K or your RSP is now earning interest. The catch is however, you cannot withdraw that money unless you are willing to pay the taxes on it when you do.

When your 401K or RSPs have matured and you are eligible to withdraw them then you will have to pay the taxes. However, at this time you will now be in a much lower tax bracket as most likely you have retired.

While you are going to realize the immediate tax saving benefits from these tax deferment schemes you also have to think carefully as to the benefits they will offer you in the future. Once you have reached retirement age you will be forced to make yearly withdrawals from this scheme. This could affect your pensions that you are receiving at that time.

RSP or 401k can be opened with most banks or financial institutions around the country.

Be Versatile

This sounds simple which it really is however as the saying goes, “don’t put all your eggs in one basket”. Meaning that you really want to invest in a variety of different options that are going to bring you a return on your investment. You want to learn how to diversify your extra money with as minimal risk as possible, while gleaning the greatest return on it.

I am investing some of my RSP savings into real estate investment. Some of the investment is split to second mortgage and some of it goes to commercial medical buildings fund. The average return is 10% per year.

Bond purchasing is another option where you may be able to earn tax free money on this.

Exchange Traded Funds or (ETFs) are another choice for investment purposes. They are bit less risky than stocks, but are similar to mutual funds and they do trade on exchange. They are much easier to use and you can make lower investments with these.

There is the option also of playing the stock market, but this can be risky business. If the stock you purchase crashes then so do you. In my passive income section you will find some creative ideas for investing your hard earned money.

You may want to jump forward a few years in your thinking and try to project what your financial situation may be like so you can recognize any potential downfalls that may be created as a result of the investments that you are doing now.

Remember that the financial planning that you are doing now is for padding your future so you need to know what your financial needs are going to be then, and make the right decisions now for that time.