A registered retirement savings plan (RRSP) is a personal savings account that has special tax advantages. RRSPs can hold a variety of qualifying investments, including treasury bills, guaranteed interest products, mutual funds, segregated fund contracts, bonds and equities. As well, some types of investment contracts, such as registered guaranteed investment fund contracts, are themselves RRSPs.
An RRSP is such a powerful savings vehicle because your contributions are tax deductible, and the taxes on any investment growth are deferred until you take your money out. Tax-deductible contributions mean you'll have more of your income available for your current needs, even while you're saving for the future. And tax-deferred investment growth (interest, dividends, capital gains) keeps more of your money working for you.
When you withdraw money from your RRSP, it is taxed at your tax rate at the time you take it out. But if you're like most people, you'll be retired when you start to take withdrawals, so your tax rate will likely be lower than when you were employed, and you'll be able to keep more of your hard-earned money.
RRSP contributions can lead to good news at tax time, because they’re deductible. But everything has its limits, including your RRSP. The CRA tells you your RRSP contributing room in the tax assessment you get after filing your tax return each year. Although you could calculate your contributing room by yourself, it’s easier to rely on the CRA’s calculation. Generally, you’re allowed to contribute up to 18% of your previous year’s earned income, to a maximum set each year by the Income Tax Act and Regulations, plus any unused contributing room carried forward from prior years.
Starting and building an RRSP is an important step towards securing your financial future – and professional guidance can be a valuable part of your decision-making. An advisor understands how RRSPs work and can show you how to structure your contributions and choose your investments to make the most of the benefits offered by this powerful savings vehicle.
* This information is meant for educational and illustrative purposes only. It is not meant to be tax advice. You should consult a tax professional for specific tax advice.