Registered Retirement Savings Plans (RRSPs)

A Registered Savings Plan (RRSP) allows you to grow your investments tax-free. Registered with the federal government, individual RRSPs offer a number of unique benefits that can help individuals save more for their future.

What is an RRSP?

An RRSP is one of the most common portions of retirement plans in Canada. Individuals—as well as their spouses or common-law partners—can contribute to these plans up to an annual RRSP contribution limit using a mix of investments, including stocks and mutual funds.

What’s more, RRSPs have two tax benefits that help you save for your retirement:

1. Tax-sheltered growth—Investment income in your RRSP isn’t taxed while within the plan. In most cases, investors won’t have to pay any tax until funds are withdrawn. Because you may be in a lower tax bracket once you’re ready for retirement, your total savings can be significant.
2. Tax deductions—Individual RRSPs can be used to reduce your tax, as contributions are deductible within specified limits.

You can also withdraw funds from your RRSPs without being penalized, provided the money is repaid by a specified time. This can be particularly useful for large purchases, like buying your first home or paying for your education.

READ: Learning for Life with the RRSP Lifelong Learning Plan (LLP)

There are a number of qualifications you must meet in order to open an RRSP. Simply put, if you have earned income and file an income tax return in Canada, you can contribute to an RRSP until Dec. 31 of the year you turn 71.

You must also have contribution room available, which will be stated on your annual Notice of Assessment sent by the Canada Revenue Agency (CRA).

RRSPs are one of the best ways to save for retirement and ensure you are financially secure once you leave the workforce.

To get started with RRSPs, or to learn more, contact us today.

FAQ

• Why are RRSPs Important?

Unless you work in the public sector, it is unlikely that you have a defined benefit pension plan for retirement. As a result, that puts the responsibility on you to save sufficient money to meet your retirement income objectives. An RRSP can be a great tool for accomplishing this goal.

• How do RRSPs work?

The amount of money you may place in an RRSP is calculated based on your “earned employment income”. The maximum amount of money you can place in an RRSP in a given year is calculated based on 18% of your previous year’s “earned income” = subject to an annual dollar maximum. An easy way to find out how much you can place into an RSP is to look at the Notice of Assessment you would have received from the Canada Revenue Agency after submitting your tax return for the previous year (there is an indication on it of your RSP contribution limit for the current year). You are able to deduct against your income contributions made to an TSP. When money is withdrawn from an RSP, the full amount withdrawn must be included in your income for that year. Accordingly, an RSP will work best where the tax bracket you are in when withdrawing money is lower than the tax bracket you were in when contributing.

• Which RRSP account is best?

It must first be mentioned that the acronym “RRSP” simply refers to the tax treatment of the money invested. It is not in itself a specific investment. A full range of investments are qualified to be placed into an RSP: GICs, stocks, bonds, and mutual funds to name a few.

The best portfolio for an individual will depend on their personal risk tolerance and investment time horizon. We recommend working with a professional financial advisor to properly determine that.

• Are RRSP withdrawals tax-deductible?

Yes, they are. You are able to deduct contributions made against income in the current year or carry forward some or all of the deductibility into a future year if it would be more advantageous to do so.

• When can RRSPs be withdrawn?

RRSPs can be withdrawn at any time, provided that the investment(s) you are in is liquid. GICs could only be redeemed at their maturity dates. As mentioned above, the amount of any money withdrawn from an RSP must be added to your income in the year withdrawn. Ideally, withdrawals should then only be made in years of lower income

• Which RRSP should I invest in?

The best portfolio for an individual will depend on their personal risk tolerance and investment time horizon. We recommend working with a professional financial advisor to properly determine that.

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