A Registered Retirement Savings Plan (RRSP) lets you build tax-deferred retirement savings.
You can deduct your RRSP contributions from your taxable income, and your investments grow sheltered from tax until you make a withdrawal. For example for an annual $1,000.00 RRSP investment with a marginal tax bracket of 33%,you will receive an estimated $330.00 reduction in income tax so your out-of-pocket investment is only $670.
Is an RRSP for you?
If you are like most Canadians, you need to rely on your own savings to fund the retirement lifestyle you want. If you have earned income, an RRSP is one of the most tax-efficient solutions.
How RRSPs work
Canada Revenue Agency prescribes an annual maximum contribution amount based on a percentage of your earned income. To find out how much you can contribute, check your Notice of Assessment from Canada Revenue Agency.
Eligible RRSP investments include cash, guaranteed deposits, segregated and mutual funds, stocks and bonds.
Your RRSP contributions are deducted from your earned income for that year and your investments in an RRSP grow sheltered from tax.
You can withdraw from your RRSP at any time, provided your RRSP is not locked-in under pension legislation. The amount you take out is added to your income in the year of withdrawal and tax is withheld at source.
When you turn 71, you have to close your RRSP. You have three options at this point:
- Transfer your investments to a RRIF ( Registered Retirement Income Fund )
- Use the funds to buy an Annuity
- Cash in your investments and claim the entire amount as income
Key Features and Benefits
Immediate tax deductions
Every dollar you contribute to an RRSP, within your RRSP contribution limit, reduces your earned income for that year. This reduces the amount of tax you pay and is especially beneficial if you are in a high marginal tax bracket.
Tax-sheltered growth
The investment growth in your RRSP is sheltered from tax. That means you don’t have to pay taxes on interest, dividends or capital gains from your RRSP investments while the funds remain in the RRSP.
Over the years it could mean a lot more money in your pocket to fund the retirement you want.
For example, if you are in a 41% marginal tax bracket, a $50,000 investment earning a 6% average annual compound rate of return would grow to $151,280 in 20 years.*
That same investment in a non-sheltered plan would only grow to $96,833. That’s a difference of $54,447, due to marginal tax at 41% on growth.*
Spousal contributions
Another way to reduce your overall tax bill may be to make a spousal contribution. The higher-income spouse can contribute to the lower-income spouse’s RRSP.
The contributing spouse always gets the tax deductions, but generally, the lower income spouse pays the tax when the money is withdrawn.
*Estimated. Assumption: No withdrawals/6% average annual compound return consistently for 20 years
