HOW TO DECREASE YOUR TAXABLE INCOME AND STILL MAKE MONEY (AND IT’S LEGAL!)

There are so many reasons to invest, and, of course, the main one is receiving returns on your investments. But just putting cash aside into investment portfolios can also be incredibly lucrative. In fact, it’s something Canadians can do every single year to put money aside and reduce taxes.

“What on earth are you talking about?”

Well, I’ll tell you. Canadians have the opportunity to start investing in their Registered Retirement Savings Plan (RRSP) each year. But were you aware that these investments go far beyond simply putting cash aside for the day you retire?

In fact, every single dollar you put into your RRSP can then come out of your total taxable earnings. While this varies from province to province and territory to territory, the results are similar. You put cash in and take taxes off.

For example, let’s say you’re making $55,000 that will be taxed come tax time. You live in British Columbia, so you’re looking at federal taxes at 20.5% and provincial taxes of 7.7%. Now, let’s say you were able to put aside a whopping $12,000 over the last few years, and you wanted to put that into your RRSP this year. This would bring you down to $43,000 in taxable income, bringing you to the next tax bracket!

That’s enormous savings. You’re now just being taxed 15% federally and 5.06% by the province. This means instead of handing $15,510 over to these governments, you’ll just be providing them with $8,815! That’s savings of $6,695 back in your pocket!

Use it wisely

Now, I’m sure not everyone can manage to put aside $12,000 each and every year. That’s a given. However, I would do this calculation of how much you’re saving in taxes each year. Figure out what you’re paying the government and, more importantly, what you’re saving. Then use those savings, along with any tax refund, to put right back into your RRSP.

By doing this, you’re already setting up your RRSP for more savings in the next year. Plus, you’re investing it in your future retirement goals. Ones that only get more expensive as the years go on, as I’m sure you’ve recently seen.

Once you’ve done this method of saving, you can move on to the last and most lucrative step: making money.

Invest is best

Once you’ve invested in your RRSP, it’s clear that the final step is going to be investing. If you’re looking to create long-term steady returns, with passive income for more cash, then the best option I would choose are Big Six banks.

Canadian banking institutions are solid long-term stocks that have been around for decades — and even hundreds of years in the case of Bank of Montreal (TSX:BMO). In fact, BMO stock is also a great deal right now. While it trades in value territory, it offers a dividend yield of 4.76%. Plus, lots of growth opportunities after purchasing Bank of the West before the huge rise in interest rates.

Then, for example, if you were to put that $12,000 into BMO stock right now, you could use that passive income to invest right back in the stock. Doing this year after year will increase your total portfolio substantially, creating even more funds for retirement.

So, use your RRSP to your advantage. Whether it’s saving taxes right now or preparing for your future, it’s a win no matter how you look at it.

The post How to Decrease Your Taxable Income and Still Make Money (and it’s Legal!) appeared first on The Motley Fool Canada.

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• Canadian Banking Stocks: Secure Your Portfolio for July 2023 and Beyond
• Investing for Retirement: Check Out These Dividend-Paying Stocks in Canada
• Better Buy: Canadian Bank Stocks or GICs?
• Safeguarding Your Wealth: 5 Safe Stocks to Buy in a Rising Interest Rate Market

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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