RRSP is a popular type of investment and is an acronym for Registered Retirement Savings Plan. It is a tax-advantaged account, and the government created it to give tax breaks to the people who invest in RRSP. Any money that you invest in RRSP will be excluded from CRA taxes the year you deposited it, and will only be taxed years down the line when you withdraw it. Thus, RRSP is a fantastic way to cut down the tax bill for the current year.
In simple words, you can say ‘save today, to live tomorrow.’ It is a retirement investment vehicle. In this type of investment, every year, you are allowed to contribute up to 18% of your earned income. Additionally, you can contribute the unused amount from the previous years.
The income tax return that you receive by investing in RRSP is tax-deductible. It means, for now, the income tax return that you get is free money. Later, on reaching retirement when you withdraw the money, you have to pay taxes only on the withdrawn amount. And it is totally based on your tax bracket. The idea behind this is, to invest in the high earning years and withdraw in your low earning years.
Benefits of RRSP
- The contribution you make is tax-deductible – Investing in RRSP leads to a reduction in your tax return. If your income is lower for the current year, you can take the deduction for your contribution to the next year. In this way, your tax savings increase during your higher tax bracket period. However, while contributing, make sure that your RRSP fits into your retirement and financial plan.
- It can be converted to regular payments after retirement – Your RRSP savings can be transferred into an annuity or a RRIF that too tax-free. You will have to pay tax on the amounts you receive. But as you will be in the lowest tax bracket period, you have to pay less tax.
- A spouse RRSP can decrease your combined tax burden – If you earn more than your spouse, you can contribute to spousal RRSP to help build tax-free savings. Moreover, the retirement income will split between you two, and thus, the total tax you pay will be less.
- You can borrow from your RRSP to pay for your education or to buy your first home – Under Home Buyers’ Plan; you can withdraw up to $ 25,000 for making a down payment for your first home. Also, under the Lifelong Learning Plan, you can withdraw up to $ 20,000 to pay the education fees of yours or your spouse. And the good thing is you need not to pay tax on the amount you withdraw. The tax will only be imposed if you fail to pay the money back within the specified time.