What is an RRSP?

An RRSP is a retirement savings plan that you establish, that we register, and to which you or your spouse or common-law partner contribute. Deductible RRSP contributions can be used to reduce your tax

One key deduction not only offers tax benefits, but it also helps you save systematically and prepare for retirement and other financial needs. Registered Retirement Savings Plans (RRSPs) let you put money into a registered plan and deduct the money from your taxable income until you take it out of the plan.

• Deducting your RRSP contribution from your net income means you don't have to pay income taxes on it until you take it out of the registered plan. You will pay lower taxes on the money in the plan when you take the money out if you are in a lower tax bracket at that time.
• An RRSP can include almost any type of investment. Ensure that the investment is a good one for your needs. Returns may be guaranteed or they may not—some types of investments, such as stock market shares, can lose money. 
• The maximum amount you can put into an RRSP depends on your income. It's listed on the Notice of Assessment that the CRA sends you when you file your annual tax return. For example, the maximum limit for 2021 was $27,830. If you did not contribute the maximum in previous years, you may be able to contribute more.
• RRSPs are designed to help you save money for your retirement. You can withdraw money from your RRSP for certain purposes, such as buying your first home and financing your education. However, you will have to pay it back within a limited period of time. In addition, if you take your money out of the plan for any other reason before you retire, part of the amount you take out will be withheld for taxes.

Tip

You have 60 days after the end of the year, usually March 1, to put money in your RRSP to get a tax deduction for the previous year. But don't wait until the deadline. Begin regular contributions (monthly or every payday) as soon as possible and your investment savings will start to grow sooner.

To see the benefits you can make by protecting your investments in an RRSP, 

 

Example: Michel plans to retire in 10 years. This year, he has saved $10,000 that he can invest. He's not sure if an RRSP is the best approach for him.

• In his circumstances, investing $10,000 at five percent per year for 10 years would result in earnings of $6,288.95, if his investment is in an RRSP.
• If Michel invests outside of an RRSP, he'll pay tax on his investment earnings at a rate of 31.15 percent. The tax will reduce his earnings to $4,027.82, costing him $2,261.13.
• Michel will receive a tax refund if he uses the RRSP. If he also invests the tax refund from his investment in the RRSP, it will be worth $5,074.01 in 10 years.
• Michel's investment inside an RRSP, including the re-invested tax refund, would be worth $7,335.14 more in 10 years, compared to the same amount invested outside an RRSP.
• Michel will pay income tax on the money he takes out of the plan when he retires. The amount will depend on his tax rate when he takes it out. Even after paying these taxes, Michel will likely have saved significantly more money than he would have if he had not placed money into his RRSP.

Tip

When you put money into an RRSP, it reduces your taxable income for the year, and may produce a tax refund. You can use the refund to pay down a mortgage or other debt, save for a child's education or pursue other financial goals. In this way, an RRSP helps you prepare for retirement and your other goals. Talk to a financial advisor about the best way to use an RRSP to achieve your goals.

Regular RRSP contributions

A regular savings plan is one of the best moves you can make for your RRSP. It's much easier to come up with $100 per month, for instance, than waiting until January or February to come up with $1200. By contributing more frequently, your money will begin working sooner for you. And that means your retirement nest egg will grow faster.

Small steps to a big scale 

Monthly contributions put time on your side. Even though the amounts may be small, your RRSP earns income sooner and for longer periods in a tax-sheltered environment.

	Monthly saver	Yearly saver
Amount contributed	$400	$4,800
Time period	25 years	25 years
Total contribution	$120,000	$120,000
Annual rate of return	6%	6%
Value after 25 years	$277,198	$263,350
Benefit to saving monthly	$13,848	N/A

 

Get your tax refund early

A regular contribution plan can get you one other advantage: you may be able to get your tax refund up front. Here's how.

The Canada Revenue Agency (CRA) allows your employer to take RRSP contributions into account when calculating the income tax withheld from your paycheque. So, if you contribute $100 each payday and your marginal tax rate is 40%, your take-home pay will be reduced by just $60.

To get your tax refund early, you need to file CRA Form T1213, "Request to reduce tax deductions at source" (available online at www.cra-arc.gc.ca). If your request is approved, the government will notify your employer to withhold less personal income tax from your paycheque.

 

 

Should I contribute to my RRSP or TFSA?

What’s the best choice when saving for retirement: contribute to your Registered Retirement Savings Plan (RRSP) or the Tax-Free Savings Account (TFSA)? We can help you decide which one is right for you.

• RRSP contributions give you an immediate tax deduction, and tax-deferred growth, but withdrawals are taxable.
• TFSA contributions give you no immediate tax deduction, but all growth and withdrawals are tax-free to you.

Truth is, both are good choices. In many cases, it’s a great idea to have both RRSPs and Tax-Free Savings Accounts.

Remember, the factors influencing the best choice for you can change over time, so it’s important to review your situation regularly with your financial advisor, to ensure your savings reflect both your current circumstances and reasonable expectations of the future.

Credits:- Vancity(Vancouver City credit union)

                CSA(Canadian Securities Administrators)