Here’s an example of how you can make the tax laws work for you for a change, and therefore the importance of knowing them, (or at least knowing someone else who does).
Here in Canada, we have what is called a registered retirement savings plan (RRSP). It is a tax deferred way for people to save for their retirements.
For this example we will look at someone who has both an RRSP and a mortgage. First, let’s look at some background information.
As you are most likely aware, mortgage rates are normally about 2 percentage points or so above term deposit rates for the same period. This is a fact we will take advantage of in our example.
Our taxpayer wants to set up a “self managed” RRSP. As long as certain terms are met, this is perfectly legal.
Why you ask?
I’ll tell you.
By opening such a plan, he can put his mortgage into the plan, and thus pay himself!
The advantage? A mortgage earns (as an example for this exercise only) 5% interest on a five year term, while a term deposit earns only 3%. By buying his mortgage into his retirement plan, he earns an additional 2% on his money, which can be a considerable difference on the amounts involved and over a number of years. If we assume he has a $100,000 mortgage in the plan, that’s about $2,000 a year more he has in his retirement fund.
Not too shabby, eh?
Now this has been simplified for purposes of illustration, but the idea is valid and is in common use here.
Other countries have their own plans and rules (of course), but the idea of learning how to use the tax codes to your best advantage remains the same no matter where you live.
Have a great today and a better tomorrow.
No go out there and make a buck!
-- The nicer the nice, the higher the price!