Registered Retirement Savings Plan (RRSP): Why Invest?
Demystifying the Registered Retirement Savings Plan (RRSP) and the benefits of investing in an RRSP versus a TFSA.
What is an RRSP?
An RRSP, or registered retirement savings plan, is a savings tool that lets you save money over your lifetime while lowering your taxes.
There are two key advantages of contributing to an RRSP:
- The amounts you contribute to an RRSP are deductible from your taxable income, which can entitle you to a tax refund.
- Your investment earnings are not taxable as long as your investments stay in your RRSP.
What’s more, unused contribution room can be carried forward from year to year.
Who should invest in an RRSP?
Anyone who wants to save for retirement while reducing their tax bill. Anyone under 71 years of age with employment income can contribute to an RRSP. Moreover, the money you invest in an RRSP can be used to purchase a home (HBP) or help you pay to go back to school (LLP). And there are investments for all types of investors, from the most cautious to the most risk-taking.
When should you start contributing to an RRSP?
As soon as possible, because the earlier you start saving, the more you earn on your investments. You can contribute until you’re 71; however, you must be at least 18 to contribute more than $2,000 per year. Yes, the deadline is March 1st, but it’s better to make contributions throughout the year rather than in one lump sum.
Answers to the most commonly asked questions
1. Everyone tells me that RRSPs are a great investment, but what is the impact on my tax refund?
The main advantage of an RRSP is that you receive a tax refund. This means that your RRSP contribution is deducted from your current income at your current tax rate, reducing your taxable income. By withdrawing this money at retirement, you pay less tax than you would have received in deductions, as your tax rate will normally be lower in retirement than when you were working. Until you retire, the money in your RRSP grows tax-free.
2. What’s the advantage of an RRSP versus a TFSA?
They are two different but complementary savings plans. A TFSA is a tax-free savings account, which means that you save money tax-free. You do not pay taxes on money you withdraw. But unlike an RRSP, contributions to a TFSA are not tax-deductible. The TFSA ceiling for 2023 is $6,500 and your contribution room grows from year to year. Because you save money tax-free, a TFSA is a great way to save for a short-term project, like buying a new car or paying for a trip, whereas an RRSP is better for long-term savings.
3. How much should I contribute per year?
It depends. First, it’s important to know that there is a limit on how much you can contribute per year. You can contribute up to 18% of your eligible income or up to the maximum set by the government.
You can also contact your financial advisor to see how much you can contribute based on your budget. Every person has different needs and savings goals. A financial advisor can help you set up a personalized plan to help you achieve your objectives.
4. When can I withdraw money from an RRSP? Can I do it whenever I want? And do you have any advice about withdrawing from my RRSP?
Contrary to popular belief, you can withdraw money from your RRSP at any time, not just when you retire. However, when you withdraw before you retire, you will be taxed on the amount you withdraw. Your RRSP withdrawals will be added to your annual income, which could increase your tax bracket.
The number one piece of advice is to leave your money in your RRSP until you retire. On the other hand, if you want to save money for a short-term project, you’d be better off contributing to a TFSA.
We’ve just looked at the most common questions about RRSPs. Contribute to your RRSP by the March 1st deadline and arrange to speak with a financial advisor, who can help you make the best choices for your personal needs and situation.
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