8.3.2 Registered retirement savings plans

From: Financial Consumer Agency of Canada

One key deduction not only offers tax benefits, but it also helps you save systematically and prepare for retirement and other financial needs. Registered Retirement Savings Plans (RRSPs) let you put money into a registered plan and deduct the money from your taxable income until you take it out of the plan.

  • Deducting your RRSP contribution from your net income means you don't have to pay income taxes on it until you take it out of the registered plan. You will pay lower taxes on the money in the plan when you take the money out if you are in a lower tax bracket at that time.
  • An RRSP can include almost any type of investment. Ensure that the investment is a good one for your needs. Returns may be guaranteed or they may not—some types of investments, such as stock market shares, can lose money. See the module on Investing for more information.
  • The maximum amount you can put into an RRSP depends on your income. It's listed on the Notice of Assessment that the CRA sends you when you file your annual tax return. For example, the maximum limit for 2018 was $26,230. If you did not contribute the maximum in previous years, you may be able to contribute more.
  • RRSPs are designed to help you save money for your retirement. You can withdraw money from your RRSP for certain purposes, such as buying your first home and financing your education. However, you will have to pay it back within a limited period of time. In addition, if you take your money out of the plan for any other reason before you retire, part of the amount you take out will be withheld for taxes.
  • For details, go to Canada Revenue Agency's information on RRSPs.

Tip

You have 60 days after the end of the year, usually March 1, to put money in your RRSP to get a tax deduction for the previous year. But don't wait until the deadline. Begin regular contributions (monthly or every payday) as soon as possible and your investment savings will start to grow sooner.

To see the benefits you can make by protecting your investments in an RRSP, go to Autorité des marchés financiers information on RRSP - Registered Retirement Savings Plan.

 

Michel is not sure if an RRSP is the best approach for him.

 

Example: Michel plans to retire in 10 years. This year, he has saved $10,000 that he can invest. He's not sure if an RRSP is the best approach for him.

  • In his circumstances, investing $10,000 at five percent per year for 10 years would result in earnings of $6,288.95, if his investment is in an RRSP.
  • If Michel invests outside of an RRSP, he'll pay tax on his investment earnings at a rate of 31.15 percent. The tax will reduce his earnings to $4,027.82, costing him $2,261.13.
  • Michel will receive a tax refund if he uses the RRSP. If he also invests the tax refund from his investment in the RRSP, it will be worth $5,074.01 in 10 years.
  • Michel's investment inside an RRSP, including the re-invested tax refund, would be worth $7,335.14 more in 10 years, compared to the same amount invested outside an RRSP.
  • Michel will pay income tax on the money he takes out of the plan when he retires. The amount will depend on his tax rate when he takes it out. Even after paying these taxes, Michel will likely have saved significantly more money than he would have if he had not placed money into his RRSP.

Tip

When you put money into an RRSP, it reduces your taxable income for the year, and may produce a tax refund. You can use the refund to pay down a mortgage or other debt, save for a child's education or pursue other financial goals. In this way, an RRSP helps you prepare for retirement and your other goals. Talk to a financial advisor about the best way to use an RRSP to achieve your goals.
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