RRSP and FHSA
The main advantages are :
- Returns grow tax-free
- RRSP contributions can reduce taxable income (generating tax refunds, family allowances, various credits, etc.).
The FHSA is a new type of account designed to build up savings for the purchase of your first home.
Its advantages are :
- Combine TFSA and RRSP for a down payment.
- Contributions reduce taxable income in the same way as RRSPs, with the same range of tax benefits.
- Earnings are not taxed like a TFSA.
- Unlike RRSPs, there is no obligation to repay the money withdrawn from the FHSA .
- Up to $8,000 per year, $40,000 total contribution limit.
When we talk about a tax refund, we are talking about a tax savings. In fact, when RRSP or FHSA contribution deductions are used, tax payable is recalculated at a lower rate, since income is lower.
Since the tax deducted from each paycheck does not take these deductions into account, we get a tax return (refund).
Using Reward Points to Maximize Tax Returns
Getting a tax refund with credit card points
You can redeem 60,000 NBC Rewards points for a $500 contribution to an RRSP account.
|Marginal tax rate||27,53 %|
So with 60,000 points, you can get $637.65, which is a better value than 60,000 points for $600 in travel credit!
The higher your income, the higher your marginal tax rate and the higher your return.
Then, by putting the $137.65 tax savings into a child’s RESP (Registered Education Savings Plan), you can take advantage of an additional 30% grant or $41.30.
That means your 60,000 Reward Points can equal $678.95 in value if you contribute to an RESP!
Get a return with points
Your new $500 RRSP contribution will start to grow depending on the product you choose.
For example, I bought $500 worth of Air Canada shares on February 9, 2021, and have had a 15.30% gain since purchase. My RRSP account shows $576.50 on February 9, 2022.
So, with 60,000 NBC Rewards points, I was able to get $714.15 ($500 contribution + $137.65 tax return + $76.50 return) on top of the grants in the RESP.
Get more disposable income with points
Another magical aspect of RRSP or FHSA deductions is that they can be used for tax optimization purposes.
Many tax credits and government assistance are determined by taxable income. So, if you use RRSPs or FHSA to reduce your taxable income, you’ll be “poorer” in the eyes of the government (even though you’ve increased your savings) and your financial assistance will be increased!
There are different tax optimization strategies or sweetspots, depending on the situation.
Contribute to an RRSP or FHSA with a low-tax income
We often hear that you should not contribute to an RRSP if you have a low income. This is not entirely true. While it’s best to maximize the TFSA before adding to the RRSP in these situations, it may be worthwhile to turn to the RRSPwhen purchasing a home.
Also, it is possible to defer the deduction of the RRSP contribution. You won’t get the tax refund right away, but you can earn tax-sheltered returns right away.
The same applies to the FHSA , which allows you to grow your money and withdraw it without being taxed on the return! However, with the FHSA , we have to contribute for 5 years in a row when we start, so it may be preferable to wait for the right moment when we can plan on saving $8,000 a year to maximize the product.
For example, an 18-year-old student has saved $7,500 with his summer jobs since 15. Depending on his contribution room, he can maximize his TFSA to $6,000 and use the excess to contribute to his RRSPs. Then he can wait until he returns to work to maximize his tax refund.
How can I easily earn points to invest in my RRSP or FHSA?
The various institutions listed at the beginning of this article offer reward points as a welcome bonus. So, it is possible to get points for an RRSP contribution almost for free with these credit cards!
To follow up on the examples in this article, let’s look at what National Bank is currently offering as a welcome bonus.
All three of National Bank’s flagship products earn NBC Rewards points. That’s money for RRSP contributions!
These cards also give you between 1 and 5 points per dollar on all your purchases, depending on the card and the purchase category, even at Costco! This can add up to 5% back to your next RRSP contribution.
Students or low-income individuals can earn these points with the National Bank Platinum Mastercard.