Everything You Need To Know About RRSP

Everything You Need To Know About RRSP

If you ever wondered if you can plan for retirement, but not know where to start, take a look at RRSPs.

What Is an RRSP?

A RRSP, or Registered Retirement Savings Plan, was created in 1957, as part of the Canadian Income Tax Act. The Canadian government developed RRSPs to help everyone be able to save for retirement. It is registered with the government, but overseen by the Canada Revenue Agency (CRA.) The CRA sets the rules for RRSPs regarding asset allowance, annual limits for contribution and timing of contributions.

Simply put, an RRSP is a financial account that keeps saving and investments for retirement. Money placed in this account will grow, with no tax, until money is withdrawn. It is then marginally taxed. The contents determine the amount of growth. You and your spouse or common-law partner can also make contributions. RRSPs are great for retirement, but not for short term savings because your annual income will increase, causing you to pay more taxes.

Purpose of an RRSP is to save for your retirement years. You can also use the funds for buying a house or using for education costs for you or your spouse.

Who Can Get An RRSP?

You can get an RRSP as an employee or if you are self-employed. You are eligible for an RRSP if you have a social insurance number, filed a tax return and have earned income. You can contribute to an RRSP until you are 71-years-old.

Types of Registered Retirement Savings Plans

  • Individual RRSP: this is set up by one person. This person is the account holder, as well as the contributor.
  • Group RRSP: created by an employer for employees, funded by payroll deductions. It has immediate tax savings for contributors.
  • Spousal RRSP: an RRSP providing benefits for a single spouse, with tax benefits for both spouses. A high-earning spouse may contribute to a Spousal RRSP in their (account holding) spouse’s name. Retirement income is divided evenly, and both will get low tax rate.
  • Pooled RRSP: created for self-employed or small business employers and employees.

Three Tax Advantages for RRSP

  1. Tax-deductible Contributions: immediate tax relief by deducting your contributions to your RRSP from your yearly income.
  2. Tax-sheltered Earnings: The money made on RRSP investments will not be taxed as long as it stays in the RRSP.
  3. Tax deferral: You only pay tax on your RRSP savings when you withdraw them from the plan, this includes both contributions and investment earnings. This tax liability has been deferred to when your marginal tax rate will be lower in retirement.

It is a good idea to start a RRSP sooner than later. This will allow the funds to growth over time and allow you to contribute as much as possible.

Planning for your retirement is crucial. With the right knowledge and advice, you can make the most of your RRSP and achieve your financial goals. Contact Harpreet Puri for expert guidance.