What is an RRSP?

Many of in Canada have heard of or think we know about Registered Retirement Saving Plan’s (RRSP), but many of us do not really know very much, as RRSP’s can be quite complex.

A recent poll showed 39 percent of Canadians believe that RRSPs are pointless because you’ll pay back all of the savings in taxes anyway. Although you do pay taxes on RRSP withdrawals, most investors will pay less tax and end up farther ahead by putting this money into an RRSP since their income in retirement will be less than while they’re working.

Even if you pay the same tax rate during retirement as you do while working, your “worst case” is getting the same net amount as you would with a Tax Free Savings Account so you’d get a similar tax-free rate of return.

All other things being equal, an RRSP contribution is typically better than a TFSA one (better equals you’ll have more money net in your pocket in retirement) if you’re income will be lower during retirement. RRSP vs TFSA will be a wash if you expect to be in the same tax bracket during retirement and the TFSA option will generally win out if your income is expected to be higher.

One big catch is what you do with the tax refund you receive after making the RRSP contribution – if you re-invest the refund into the RRSP you end up taking full advantage of the program’s features but if you use the refund to go on a trip or go shopping, you’re really missing the point.

Many people feel that they don’t have enough money left at the end of the year to put some aside in an RRSP. While balancing a budget is certainly challenging, you really can’t afford to not put money away.

While paying off debt is often at the top of the priority list for many Canadians, doing so in place of saving for retirement doesn’t always make sense. High-interest debt such as credit cards should take priority, but neglecting your retirement savings in favour of paying extra onto a mortgage is often the wrong move depending on your unique circumstances.

There is an unwarranted concern by many of saving too much money in an RRSP since they fear a large tax bill when they die. While the market value of your RRSP or RRIF does, in fact, need to be included as income on your terminal tax return, there are numerous exceptions.

Your RRSP value can potentially be rolled over to a surviving spouse, a financially dependent child or grandchild or an RDSP (disability) savings plan. More likely, you will draw down on your RRSP values over many years of retirement.

Many (most?) Canadians still don’t fully understand the tax consequences and planning opportunities that exist with the RRSP program. Don’t let unfounded RRSP myths or advice from un-informed people keep you from maximizing your RRSP savings opportunities.

And don’t allow missing this year’s “deadline” (March 2) keep you from getting your retirement savings plans in order. You can start to get on track at any time of the year.

Given that we don’t know much about RRSP the following question and answer found on a site for new Canadians may be worth reading.

Question: What are RRSPs and why are they beneficial? Do I need to set up RRSPs in order to be financially successful in Canada or are there other, better, immigrant-friendly options for me to go with since I am new to the country?

Answer: RRSPs or Registered Retirement Savings Plans are another unique Canadian financial tool that helps you plan for your future retirement. Within an RRSP you can hold a wide variety of investments including cash, mutual funds, stocks, bonds etc. An RRSP is registered with the Canada Revenue Agency and has two key advantages: 

• Contributions made to your RRSP are tax-deductible. This means an RRSP contribution reduces your total income used to calculate taxes owed when you complete your annual tax return.
• Investment earnings are tax-deferred. This means your investment earnings can grow over time and are only taxed when you withdraw from the plan — usually at retirement. 

While RRSPs reduce the amount of tax payable to the government, there’s a limit on how much you can contribute each year.  Your maximum contribution is generally 18 percent of the amount that you earned from employment during the previous year, up to a specified dollar maximum set by the government.  After your first year of filing a tax return in Canada, your annual Notice of Assessment from the Canada Revenue Agency will outline your maximum RRSP contribution.

The main purpose of an RRSP is to help save for your retirement. But the government also allows you to use those funds for other important life goals such as buying a home or for the post-secondary education of you or your spouse.

Ask your financial institution for more details on how you can use an RRSP to plan for retirement, education or buying a home.