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An RRSP: Always In Season

Registered Retirement Savings Plans are one of the most well-used investment vehicles in the country. Developed by the Canadian government in the 1950s, the RRSP is designed to encourage personal retirement saving.

What can you invest your RRSP in? RRSPs allow you to invest in stocks, bonds, mutual funds, annuities, cash and precious metals.

How much can you contribute to your RRSP? Each Canadian can contribute up to 18% of their annual income to an RRSP. Only a few Canadians reach their limit each year. The unused portion of your contribution room is carried over so that you can make higher contributions as you are able. (Your contribution room is included in your Notice of Assessment document.)

What’s the benefit? The big benefit of RRSPs is the immediate tax deferral. Every dollar you invest in an RRSP before the deadline helps to offset the income tax you would owe for the previous tax year.

Let’s say Heather makes $100,000 per year. Her combined federal and provincial taxes for 2016 would be $29,949 in Nova Scotia. If she makes her maximum RRSP contribution of $18,000, she will reduce her 2016 tax bill to $22,681 – a tax savings of $7,268!

What’s the long-term impact? Aside from the tax savings, the real reason to contribute to an RRSP (or to invest in general) is the long-term, compound growth. For example, let’s say Mark is 40 and saving for retirement. He invests $500 in his RRSP each month. If his money grows by an average of 5% per year, he will have accumulated $297,754 by the time he turns 65.

What happens when I want to spend the money I have in my RRSP?

RRSPs are designed for retirement savings. So the idea is that you will start dipping into these funds after you are retired. When you are retired (or by the time you turn 71) your RRSPs convert to Registered Retirement Investment Funds (RRIF). Your RRIF withdrawals are treated as income, and you will be taxed accordingly. Generally speaking, your income level is lower in retirement (hopefully matching your expenses), and therefore you will pay less tax on it.

If you withdraw money from your RRSP before you retire, it is also taxed as income at your current tax rate, making it a less attractive option.

The Bottom Line

RRSPs can be an invaluable tool to help you reach your retirement savings goals. But it’s always smart to talk to an experienced certified financial planner to make sure this investment choice is working best for you.