An RRSP is an investment account that is registered with the federal government and primarily used to save for retirement. Within an RRSP account, you can invest in a variety of assets — stocks, bonds, mutual funds, and more. There are yearly limits, based on your income, to how much you can contribute to an RRSP. Your contributions are tax-deductible, and no taxes are payable on your money or on its growth while it’s inside the RRSP. When you withdraw money from the RRSP, however, the proceeds are taxed as income.
[Alex 00:00] Today’s topic is registered retirement savings plans, aka RRSPs. So we’ll jump right into our series of questions here. And the first one is, what is an RRSP?
[Michael 00:12] Well, the big misconception about RRSPs is that it’s an investment vehicle, like a stock or bond, mutual fund, ETF or a GIC. In fact, it’s actually a type of investment account, that, as its name implies, is registered with the federal government. And within this RRSP account, you can invest in a variety of assets, you can hold cash and all the other things we mentioned earlier — stocks, bonds, mutual funds, ETFs, GICs. This brings us to question two. What are the benefits of RRSPs?
[Alex 00:45] Well, the benefits really revolve around the idea of tax efficiency, right? When you contribute to an RRSP , you get the immediate benefit of a tax deduction. And this might mean a tax refund that you could put towards other financial planning opportunities. Additionally, over the lifetime of the RRSP, the assets within the RRSP grow tax deferred. To get an idea of how this might make saving more efficient, check out the MD Retirement savings calculator. And finally, when money comes out of the RRSP in the future, the idea is that your income will be lower than your prime earning years. So your RRSP income may be taxed at a lower tax bracket. So you know, RRSPs sound amazing. I guess the next question I’ve got here is, you know, why don’t we dump all our money into RRSP savings?
[Michael 01:25] Anyone that has earned income, a social insurance number, has filed a tax return and is under 71 years of age can open and contribute to an RRSP. There are limits to how much one can contribute, however, and your contribution room is a percentage of your previous year’s income, plus any previous unused contribution room. You can find your exact contribution amount on your notice of assessment, or you can check your CRA account online, or even give them a call. So this leads to another misconception about RRSPs, Alex, that the proceeds you receive from your RRSP are tax free.
[Alex 02:02] This is generally false. I say generally, because there are scenarios where money can come out of the RRSP without an immediate tax hit, provided that you follow some rules. Under most circumstances, though, if you take money out of the RRSP, the amount withdrawn will be added to the income for the year. So you will be responsible for withholding taxes immediately after withdrawal, which is a percentage based on how much you’re pulling out. And the way to think about that is it’s kind of a tax prepayment. So the last question we’ve got here about RRSPs is what else can you save for using an RRSP?
[Michael 02:33] That’s a great question. I mean, the benefits of RRSPs make it ideal for saving for retirement, financial goals that generally have longer time horizons. Of course, everyone is different, so speak to an MD Advisor* to see if an RRSP account makes sense for your situation. But RRSPs can also be a way to save for your first home or going back to school through the Homebuyers Plan and Lifelong Learning Plan, provided you meet certain conditions. Both allow you to withdraw RRSP money up to certain limits to buy your first home or to pursue higher education. And of course, for more information about RRSPs or to determine if any of this is right for you, please contact your MD Advisor*.