What Should You Know About RRSP?

If you’ve been living a long time in Maple Leaf country, you should have a fair idea of RRSP or Registered Retirement Savings Plan. However, if you don’t know, you have come to the right place to understand what this policy is, who it is for and what you have been losing out on.

Since its inception in 1957, the RRSP policy has been a savings vehicle for all Canadians who want to live out their golden years financially independent. You can think of it as a savings fund that can be used for pension, but it’s much, much more, with one of the advantages being the deductible RRSP contributions that you make towards the plan can be used to reduce your taxes. The income or growth in funds earned in the program is usually exempt from tax while the funds remain in it.

Read on to learn more about what RRSP is and how you can benefit from it.Explaining RRSP

As mentioned in its extended form, it’s a type of registered account created by the government way back in the 50s to encourage people to save for retirement. It’s a tax-sheltered account, and over the years, your funds have grown in addition to your contribution.

You can open a Registered Retirement Savings Plan account with any financial institution, such as insurance companies, investment firms, and traditional banks. You will have the option to invest in stocks, GICs, mutual funds, and bonds. However, you should know, that regardless, whatever the option you invest in, you will get the same tax benefits as it is held within an RRSP account.

Types of RRSP that you should know about

RRSP accounts can be classified under three different categories depending on who is contributing.

• Individual RRSPs: The account is under your name, and only you will be making all the contributions and also claim any tax benefits generated by your contributions.
• Spousal RRSP: This account is managed by you and your spouse or partner, and both of you can contribute towards the same. Consider it to split retirement income and lower your and your partners’ overall tax burden. On withdrawal in retirement, the spouse who owns the account pays taxes based on their self-tax rate.
• Group RRSP: This type of RRSP would be managed by your employer, and they will also contribute to the RRSP. Employee contributions are generally made automatically through payroll deductions.

There’s also a pooled RRSP plan that allows self-employed individuals and small business employees ( who do not have access to group RRSP) to start their retirement savings by pooling contributions.

The contribution room

Your RRSP contribution room would be calculated based on your earned income and estimated at 18% of that- that will be your total contribution room for that year. So, suppose your annual income is $50,000, so the 18% of that is $9,000. However, this would depend on different types of income and how they are taxed. You should also know that if you miss out on your contribution room for a year, you will not have to worry about it because it will add up to your total lifetime contribution, and you can use the extra room the following year.

Tax- deduction- why you should invest in RRSP?

One of the primary reasons why you should start a Registered Retirement Savings Plan account is mentioned in the title of this section- tax deductions. How, you may ask? Let’s take the $50,000 annual income example; from that amount, if you contribute $5,000, your taxable income would be $45,000. If you didn’t make that contribution, you would be paying $1,500 on $5,000 worth of income. The tax part only comes when you start withdrawing the funds, and you would only have to pay on whatever amount you choose to withdraw.

Your RRSP can convert to RRIF.

If the money that you contribute sits in an RRSP account perpetually, the government will never be able to tax it. Due to this dilemma, a rule in place converts an RRSP to an RRIF (Registered Retirement Income Fund). The RRIF forces people to withdraw funds at a pre-determined rate set by the government. By the time the account holder turns 90, all the money will be withdrawn, and as you may have guessed, the withdrawals are fully taxable. But due to having low to no income in old age, the amount being deducted has meager tax due.

Helping Canadians in making better RRSP decisions

As a Canadian, you might dream of spending your retirement years in peace with complete financial stability. With a tax-sheltered RRSP account, you can start making that dream into reality. The policy offers you an opportunity to accumulate a substantial sum of money, and you should take full advantage of it.