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Originally Posted by SeeGeeWhy
People in this thread understand that tax brackets are marginal, right?
"Lowering your bracket" by maxing out your RRSP only avoids the higher tax rate on the amount over the bracket threshold - that higher rate doesn't apply to your entire earnings.
I'm getting the impression people think a higher bracket gets applied to 100% of your earnings, but that is not true.
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Quote:
Originally Posted by Deegee
People don't understand this at all, for reducing income or for increasing it. I see people fairly regular and hear all the time the comment "I try not to work too much overtime so I don't get put into the next tax bracket".
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The sad truth is people don't really understand income tax at all, including the positives and negatives of RRSPs or TFSAs.
Too often I hear (and have seen in this thread already) that TFSAs are way better because there is no tax on them while RRSPs will be eventually taxed. While this is true, you can have way more money from the RRSP in the start becuase you avoid the tax.
RRSP - $10,000 pre-tax - $10,000 goes into RRSP and earns returns
TFSA - $10,000 pre-tax - $3,500 taxed (estimate) so $6,500 goes into TFSA and earns returns
So while the TFSA is no longer taxed, you start with $3,500 more in the RRSP. The point here is you have to decide which is better, never paying tax again on the investment income, or starting with an extra $3,500, or 50% more inital investment. Over 20-30 years, it may or may not.
Moral of the story is, I encourage everyone to fully understand the difference between RRSPs and TFSAs, as well as how progressive tax brackets work in general. A little education would go a long way to saving a ton more money.