RRSP – Registered Retirement Savings Plan

A RRSP is a legal trust established to save for retirement purposes. Registered retirement savings plans are registered with the Canada Revenue Agency (formerly Revenue Canada), with contributions being tax deductible. RRSPs may contain mutual funds, bonds, stocks, GICs, mortgage-backed equity, and contracts.

There are two major advantages to registered retirement savings plans. First, deducting contributions against one’s income is possible. For instance, if the tax rate of a contributor is 40 percent, every $500 invested in an RRSP will save $200 in taxes. Contributors can save up to their contribution limit. Second, returns are exempt from income tax, dividend tax, and capital-gains tax. Therefore, investments in a registered retirement savings plan compound at a pretax rate.

Taxes on employment or earned income are deferred until a withdrawal from the RRSP. The deferred tax is referred to as contribution tax credit. Upon cash withdrawals, the contributor’s marginal tax rate may be lower or higher compared to the rate at which the original contribution credit was claimed. This results in a benefit or penalty. Contribution tax credit may not be claimed, meaning that it can be deferred until the marginal tax rate goes up. The delay results in a penalty.

Contributors can set up a RRSP through different financial institutions, such as credit unions, insurance companies, and banks. Your financial establishment will offer advice on different RRSPs, together with information on the investment instruments they contain.

There are many programs in Canada, which are offered to retirees. Generally, when contributors’ income increases, the benefits decrease.

There are individual RRSPs, group RRSPs, and spousal RRSPs. An individual retirement savings income plan is associated with one person only. He or she is termed an account holder and contributor, being the only person who contributes to the plan.

Another possibility is to go with a spousal RRSP. Under this plan, income will be distributed more evenly between the two spouses. It is recommended that the higher-income partner contributes more on behalf of the lower-income partner. The contributor benefits by receiving tax deduction for the contribution. The lower-income spouse will receive the income, reporting it on their tax return. A third option is a group RRSP, under which an employer makes arrangements for employees to contribute. This is done by using a schedule of payroll deductions. It is up to employees to decide on the amount of contribution a year. Then, the employer deducts this amount, submitting it to a manager, responsible for administering the group account. Employees’ individual accounts are used to deposit contributions, which are then invested as specified.

While RRSPs are intended as instruments that help contributors save in the long-run, you may take out some of the money to build or buy a home. This can be done under a Home Buyer's Plan, which allows taking money out of a registered retirement savings plan. Eligible persons are allowed to withdraw up to $25,000. This money can go toward buying a qualifying home for oneself or a related person who has disability. The good news is that this money is tax free. Keep in mind that contributions should stay in your registered retirement savings plan for a period of 90 days or longer. Only then they can be withdrawn under a Home Buyer's Plan.