What is an RRSP? Registered Retirement Savings Plan Explained
- Did you know the Canadian government gives you incentives if you’re saving for retirement? Find out how an RRSP can save you money now and later in life.
- In this article, we’ll go over the basics of an RRSP and how to make the most of it.
- RRSP is not just for saving, it can also hold other types of investments such as stocks and bonds.
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What Is a Registered Retirement Savings Plan (RRSP)?
A Registered Retirement Savings Plan is a government-approved financial account that allows Canadians to save for their retirement and hold other types of investment assets.
Apart from cash savings, there are a variety of assets that can be held in an RRSP account, such as bonds, stock equities (Canadian and foreign stocks), mortgages, treasury bills, and even income trusts.
How do RRSPs Work?
An RRSP is a savings account to which you make contributions for the duration of your working life. Any money sent to your RRSP will be deducted from your income tax that year and you don’t pay tax on the income earned within the account.
It is considered a “tax-deferred investment growth” as taxes are due when eventually you’ll withdraw the money. However as this usually happens at retirement, you’ll be in a lower income-tax bracket by then.
How to Set Up an RRSP
RRSPs are easy to set up and are available at most Canadian banks, mutual funds, life insurance companies, and other financial institutions.
They are available to Canadians who earned an income in the previous tax year, who are under 71 years old, and who also file a tax return that year.
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Contributing to an RRSP, PRPP or SPP
As soon as you open an RRSP, you’ll be able to start making contributions to your account up to your annual limit.
According to the Canada Revenue Agency, your annual RRSP contribution is set in 2022 to a maximum of $29,210 and a maximum of $30,780 in 2023.
Some decide to make strategic lump sum contributions from December to March before the tax filing April 30th deadline, while others prefer making smaller contributions throughout the year. As long as you stay within your contribution room, you can choose your preferred mode of saving.
RRSPs are only for individuals in employment, there are a couple of alternative options for self-employed individuals and those with various employers. In these cases, they’ll need a pooled registered pension plan (PRPP), a retirement savings option for individuals, including self-employed individuals, or a specified pension plan (SPP), a multi-employer plan, which reduces administrative costs.
Making RRSP Withdrawals
Money can be withdrawn at any time and any age. Any sum withdrawn is considered taxable income in the year you make the withdrawal. There are a couple of exceptions such as withdrawals for the Home Buyers Plan (HBP) and Life Long Learners Plan (LLP) which will be tax-free.
A mandatory RRSP withdrawal will be required the year you turn 71. Your RRSP will then be transferred to a Registered Retirement Income Fund (RRIF).
Benefits of Investing in an RRSP
As a government-backed type of savings account, you’ll benefit from tax advantages as soon as you open an RRSP account. Here are 4 of the main benefits for RRSP holders:
Tax-deferred investment – You won’t pay income tax on any additional money made by your investment on the RRSP, as long as the money stays there.
Compound interest – The earlier in your professional life you start investing in your RRSP, the faster your savings and investments will grow until you retire.
Optimized income tax – All your contributions are tax deductible either in the year you make them or in the following years. This is particularly interesting if you’re in a higher income-tax bracket and know you’ll be at a lower level the following year.
Financing your first home – The Home Buyer Plan (HBP) allows you to take money out of your own or your spouse’s RRSP without paying tax on it, in the condition that you use it to buy a house.
In this section, we’ll answer some of the frequently asked questions about the Registered Retirement Savings Plan.
When can I withdraw from my RRSP?
RRSP holders can make withdrawals from their accounts at any time and at any age as long as the funds are not in a locked-in retirement account (LIRA). When you withdraw money from your RRSP, your financial institution will withhold the tax (if applicable) and transfer it to the government.
At what age am I eligible to contribute to an RRSP?
There isn’t any age limitation to start contributing to an RRSP, some institutions may restrict it to those over 18 years old. You’ll be able to make contributions until December 31st of the year you turn 71 years old.
RRSPs are popular amongst Canadians as it is a great tool to invest in for their retirement. The immediate tax deduction is one of the main appeals when contributing but you’ll need to consider all your tax implications before deciding on a specific saving account.
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