Registered Retirement Savings Plan (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.

Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan; you generally have to pay tax when you receive payments from the plan.

Understanding Registered Retirement Savings Plans (RRSP)

Registered Retirement Savings Plans were created in 1957 as part of the Canadian Income Tax Act.2 They are registered with the Canadian government and overseen by the Canada Revenue Agency (CRA), which sets rules governing annual contribution limits, contribution timing, and what assets are allowed.

RRSPs have two main tax advantages. First, contributors may deduct contributions against their income. For example, if a contributor's tax rate is 40%, every $100 they invest in an RRSP will save that person $40 in taxes, up to their contribution limit. Second, the growth of RRSP investments is tax-deferred. Unlike with non-RRSP investments, returns are exempt from any capital gains tax, dividend tax, or income tax. This means that investments under RRSPs compound on a pre-deferred basis.

In effect, RRSP contributors delay the payment of taxes until retirement, when their marginal tax rate may be lower than during their working years. The government of Canada has provided this tax deferral to Canadians to encourage saving for retirement, which will help the population rely less on the Canadian Pension Plan to fund retirement.

There are a number of RRSP types, but generally, they are set up by one or two associated people (usually individuals or spouses).

  • An Individual RRSP it set up by a single person who is both the account holder and the contributor.

  • Spousal RRSP provides benefits for a single spouse and also a tax benefit for both spouses. A high-earner (spousal contributor) may contribute to a Spousal RRSP in their spouse's name (the account holder). Since retirement income is divided evenly, each spouse can benefit from a lower marginal tax rate.

  • Group RRSP is set up by an employer for employees and is funded with payroll deductions.It is administered by an investment manager and affords contributors the advantage of immediate tax savings.

  • A Pooled RRSP is an option created for small business employees and employers, as well as the self-employed.

Approved Assets

Several types of investment and investment accounts are permitted in RRSPs. They include:

  • Mutual funds & Segregated Funds

  • Exchange-traded funds

  • Guaranteed investment certificates

  • Savings accounts

  • Equities

  • Bonds

  • Mortgage loans

  • Income trusts

  • Foreign currency

Home Buyers Plan

  • To qualify you need 4 years for not having a home. This changes for marriage breakdowns where 90 days to 4 years living apart can qualify you 

  • Maximum of $35,000 per member can be used. That is $70,000 for a couple and the money have to be deposited 90 days before asking for a loan

  • The home needs to be bought or build by Oct 1 of the following year

  • No interest is paid on the loan

  • The money has to be paid back in 15 years and begins the second calendar year after withdrawal

  • Cannot be used for lock-in plans

Analyzing Graphs

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