What is an RRSP?

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What is an RRSP?

Are you looking to save for your retirement and cut down on your tax bill? If this sounds good to you, then a Registered Retirement Savings Plan (RRSP) may be the perfect fit for you!

What is an RRSP?

The primary purpose of an RRSP is to help you save for your retirement. It’s a registered investment vehicle, where you can use your contributions to decrease your tax bill.

How does an RRSP work?

There is no minimum age to open an RRSP. You can open one as soon as you have earned income and are filing a tax return.

RRSP Basics

The most important things you need to know about an RRSP are:

  • Each year, your contribution room is 18% of your previous year’s earned income up to the maximum contribution limit for the current tax year. You automatically carry over unused contribution room from previous years.

  • Deposits made by you or your employer into a pension plan can impact your RRSP contribution room.

  • The Canada Revenue Agency tracks your contributions. As a result, you can deduct the amount you contribute to your RRSP from your taxable income.

  • Your contributions grow tax-free as you only pay taxes when you withdraw your money.

Advantages

The most significant advantage of an RRSP is that it provides a tax-free way to save for your future, as well as helping you save on your tax bill today because your RRSP contributions are tax-deductible.

When you are ready to withdraw money from your RRSP (which you must do starting at age 71), your marginal tax rate should be lower than it was during your working years, so you will likely not have to pay a large amount of taxes on your withdrawals.

With an RRSP, there are also two other ways you can withdraw your money tax-free:

  1. The Home Buyers’ Plan (HBP) is a program that enables you to withdraw from your RRSP to buy your first home. You must pay back the funds 15-year period.

  2. The Lifelong Learning Plan (LLP) is a program that enables you to withdraw money from your RRSP to pay for qualifying education or training. You must pay back the funds over a 10-year period.

Limitations

These are the main RRSP limitations:

  1. You can’t hold some types of investments in your RRSP, including precious metals, commodity futures contracts, and shares in private holding companies.

  2. You will have to pay both withholding tax and income tax if you make an early withdrawal from your RRSP (excluding a withdrawal for the HPB or LLP).

Want to learn more about RRSPs?

We can help you get started saving for the future with an RRSP. Contact us today!