A Registered Retirement Savings Plan (RRSP) is a type of savings account that lets you reduce your taxable income by the amount of your contribution. RRSP Investments compound tax-free until you withdraw your funds, presumably for retirement income, when your tax rate is likely to be lower. Who Can Invest in an RRSP?
Any Canadians under 71 years of age who earn employment or self-employment income can contribute to an RRSP, but the benefits are especially great for:
Medium-to-High Income Years
People approaching retirement
People saving for a down payment on a house
Benefits of Investing in an RRSP:
Tax-deductible contributions
Pre-deadline RRSP contributions are deductible against taxable income in the previous year or the current year.
Deductions can also be carried forward to future years.
Tax-free Growth
You don’t have to pay any taxes on investment gains as long as funds remain in the RRSP. This allows savings to compound faster.
Generate Retirement Income for Stability
When you’re ready to retire, you can convert your RRSP to a Registered Retirement Income Fund (RRIF) account and establish regular payments.
Income from an RRIF account will be taxable but you will potentially be in a lower tax bracket after retirement, and so pay less taxes.
Income Splitting Benefits of Spousal RRSPs
Retirement income can be split more equally between you and your spouse by contributing to a Spousal RRSP. This will reduce the amount of your household income that is taxed at the higher tax rates.
The contributing spouse receives the tax break in the year of contribution but the lower-income spouse is taxed on the funds when they are ultimately withdrawn in retirement.
Early Withdrawal Options
Temporary RRSP withdrawals are allowed without paying any tax if you use the money for specific purposes and pay the money back within the specified time periods (e.g. 15 years) for:
Home Buyers Plan – Each spouse can withdraw up to $35,000 from your RSP to contribute toward a qualified home purchase
Lifelong Learning Plan – withdraw from your RSP to contribute towards education costs
Once again the deadline for RRSP contributions deductible against your 2021 income is March 1, 2022. Reply to this email or Click here to schedule an appointment to discuss your RRSP options. I look forward to financial planning with you!