What tax planning technique is Henry using by contributing $7,000 annually to his RRSP until retirement?

What tax planning technique is Henry using by contributing $7,000 annually to his RRSP until retirement?

• A. Trading across taxpayers.
• B. Trading across investment vehicles.
• C. Trading over time.
• D. Trading over organizational forms.

Answer: (C)

Contributing to a Registered Retirement Savings Plan (RRSP) annually exemplifies the concept of "trading over time." This tax planning technique involves making contributions over a period to take advantage of the tax deferral benefits that the RRSP provides. By contributing each year, Henry is able to reduce his taxable income for that year and defer taxes on investment growth until he withdraws the funds, typically during retirement when he may be in a lower tax bracket. This strategy allows Henry to benefit from compound interest on his investments, as the money that would have gone to taxes can instead grow within the tax-protected environment of the RRSP. Over time, this accumulation can result in a significantly larger retirement fund. The timing of contributions and withdrawals is a key aspect of effective tax planning and retirement strategy, which is why this approach is categorized as trading over time.

Contributing to a Registered Retirement Savings Plan (RRSP) annually exemplifies the concept of "trading over time." This tax planning technique involves making contributions over a period to take advantage of the tax deferral benefits that the RRSP provides. By contributing each year, Henry is able to reduce his taxable income for that year and defer taxes on investment growth until he withdraws the funds, typically during retirement when he may be in a lower tax bracket.

This strategy allows Henry to benefit from compound interest on his investments, as the money that would have gone to taxes can instead grow within the tax-protected environment of the RRSP. Over time, this accumulation can result in a significantly larger retirement fund. The timing of contributions and withdrawals is a key aspect of effective tax planning and retirement strategy, which is why this approach is categorized as trading over time.