The ABC's of RRSP's by Gerry Steckler, CMA
Most Canadians are aware of the existence of Registered Retirement Savings Plans (RRSPs) but they really do not know much about how they actually work or how they can use them to benefit them fully.
If you think that an RRSP is that thing you're putting money into to save for retirement, and you think that it's a type of investment like a mutual fund; then you should know that it's simply a saving or investment account with certain tax-saving characteristics.
There are three main reasons for saving within an RRSP:
- To save for retirement.
- To help purchase your home under the First Time Home Buyers Plan.
- To pursue further education under the Lifelong Learning Plan.
Contributions are tax deductible
You can claim your RRSP contribution as a deduction on your tax return. For example, if you're earning above $50,000 per year, a $1,000 RRSP contribution reduces the tax you pay by approximately $300.00. So in essence the contribution costs you only $700.00. This can have a huge impact on saving over a long period of time.
You won't pay any tax on investment earnings as long as they stay in your RRSP. This tax-free compounding allows your savings to grow faster.
RRSPs can be especially useful for regular employees or self employed business owners who pay a lot of tax on their employment income. By contributing to an RRSP, they are allowed to defer their income tax. They benefit from lower taxes payable now, and then will expect to pay it later when they withdraw the funds (presumably when they retire and are at a lower tax bracket).
What happens to my RRSP when I retire?
How can a spousal RRSP reduce your combined tax burden?
For answers to these questions, see my next article, or contact me to find out sooner.
Gerry Steckler, CMA