Tax Tips for Young Professionals

Allan Madan, CA
 Jan 22, 2016

Are you a young professional that’s just starting to handle your own finances? Now that you’re making more money than when you were in college, what do you do with it all? How do you plan on saving it and spending it? In this video, I will reveal some essential tips you should consider towards your first big investments.

How Do You Plan on Saving Your Pay Cheques for Retirement?

When you have a steady flow of income, make sure to put a portion of it away for when you retire. The first financial investment you make, once you start earning should be a registered retirement savings plan. You might think “I could just be putting my money in a savings account, why do I need an RRSP?” An RRSP would be beneficial because the amount you contribute is tax-deductible, at 18% of your prior year’s earnings or a maximum of $24,930 (2015), whichever is lower.

If you have another 30 years till retirement, why is better to start saving right away using an RRSP? Because you get the most money out of an RRSP when you start early and it keeps growing with a rate of return. The longer the funds are sitting in the RRSP, more income is accumulated. For example, if you invest $5,000 in an RRSP when you are 30, assuming an 8% return, 30 years later it will be worth around $50,000. But if you invest $5,000 when you are 20 with the same rate of return, in 40 years it would be worth at around $108,000. In both examples, you’ll be 60 years old, but when you invested 10 years earlier, the cash accumulated is almost double. Either way, it is a good investment because this money is growing tax-free while it is sitting in an RRSP, but the earlier you invest, the higher the return.

Your First Big Purchase as a Young Professional

For most people, it’s either buying a car or a home. The first thing most young professionals think to buy when making more money is a new car. But what if, you could buy your first home sooner if you postponed buying a car? Instead of buying a car, put your money towards your first home or mutual funds. A car is not an investment. Let’s say you want to buy a car that is $25,000. Next year, it will already be worth 20-40% less. After 5 years, it’s almost worthless, it’s a depreciating asset. But let’s say instead you use that $25,000 to put a down payment towards a purchase of a $250,000 condo. If condo prices continue to appreciate by 5% per year, for example, then your condo will be worth $276,000 next year. This represents an economic gain of $26,000, which is completely tax-free so long as your condo is your primary residence.

Buying Your First Home:

When buying your first home, consider the home buyers plan. This plan allows you to borrow up to $25,000, tax-free from your RRSP savings. Without the home buyers plan, you would have to pay tax on the amount that you take out from your RRSP. Be mindful that you are only borrowing the money, you would still need to pay it back into your RRSP. For the first two years, there is no payment required, after that, you must pay 1/15th of the balance each year for the next 15 years. Also, you receive a tax credit of $5,000, when purchasing your first home.

So Here’s the Tip:

Once you are able to, make sure the first thing you invest in is a registered retirement savings plan. It is not only beneficial for retirement, but also for buying your first home. Consider the cost of a car, versus buying a home. Put your money into something that gains in value, versus something that depreciates in value every year.


The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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  1. What is the advantage from borrowing $25,000 tax free from my RRSP (and having to put it back) vs. using $25,000 I have in a savings account (no restriction to put it back anywhere)?

    1. Hi Gabriel,

      The advantage is that you are able to free-up cash that was otherwise trapped in an RRSP. This cash can be used toward your home purchase, and you can keep the other $25,000 saved in a TFSA until you need access to it.


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