What is an RRSP?
The RRSP, or registered retirement savings plan, is a savings tool that lets you save money over your lifetime by lowering your tax bill.
There are two key advantages of contributing to an RRSP:
- First, the amounts contributed to an RRSP are deducted from your taxable income, which can entitle you to a tax refund.
- Second, the interest earned on your investments is not taxed as long as it stays in your RRSP.
Additionally, unused contributions can be carried forward year after year.
Who should invest in RRSPs?
Anyone who wants to save for retirement by reducing their tax bill. Anyone under 71 years of age who earns employment income can contribute to an RRSP. Moreover, the money invested in an RRSP can be used to purchase a property (HBP) or to go back to school (LLP). You should know that there are several investment funds that meet the needs of all types of investors, from the most cautious to the most aggressive.
When to start contributing to an RRSP?
As soon as possible, because the earlier you start to save, the more you increase your returns. 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, however, contributing throughout the year rather than in one large amount may be easier.
Answers to the most commonly asked questions
1. Everyone tells me that its more advantageous to contribute to an RRSP, but what is the impact on my tax refund?
The main advantage of an RRSP is that it allows for a tax refund. This means that contributing to an RRSP allows for a deduction from your current income at your current tax rate, thus reducing your taxable income. Thus, by withdrawing this money at retirement, you will pay less tax than what would have received in deductions as your tax rate should be lower at retirement than when you were working. In the meantime, the money invested in your RRSP will grow tax-free.
2. What’s the advantage of an RRSP versus a TFSA?
Two different but complementary savings plans A TFSA is a tax-free savings account, which means that it allows you to save money tax-free. When you withdraw money, you will not pay taxes. Unlike with an RRSP, contributions made to a TFSA are not tax-deductible. The annual TFSA ceiling for 2023 is $6,500 and know that your TFSA contribution room builds from year to year. Because it allows you to save money tax-free, a TFSA is perfect for saving for a short-term project, like buying a new car or paying for a trip whereas an RRSP is more advantageous in terms of long-term savings.
3. How much should I contribute per year?
It depends. First, it’s important to know that there is a limit that people can contribute per year. You can contribute up to 18% of your eligible income or the limit set by the government.
You can also contact your financial advisor to see how much to contribute based on your budget. Everyone has different needs and savings objectives. Meet with a financial advisor, who 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 advice regarding withdrawals 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, the tax not deducted from your contribution will be deducted. The amounts withdrawn from your RRSPS will be added to your annual income, which could raise your taxes.
A piece of advice, wait until you retire to withdraw money from your RRSP. However, if you want to save money for a short-term project, it would be better to contribute to a TFSA.
Conclusion
Those are the most commonly asked questions about RRSPs. contribute to your RRSP by the March 1st deadline, if you haven’t already done so, and speak with a financial advisor, who can help you make the best choices based on your needs and your situation.