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RRSP

An RRSP (Registered Retirement Savings Plan) is a tax-advantaged investment account in Canada designed to help individuals save for their retirement

What is a RRSP?

An RRSP is a retirement savings plan that you establish, that we register, and to which you or your spouse or common-law partner contribute. Deductible RRSP contributions can be used to reduce your tax.
Any income you earn in the RRSP is usually exempt from tax as long as the funds remain in the plan; you generally have to pay tax when you receive payments from the plan.

How does an RRSP work?

RRSPs are pretty simple. Contributions are made pre-tax and they grow tax free until withdrawal. If a contribution is made with post-tax income then you’ll get your tax back at the end of the year.
RRSP withdrawals will incur a withholding tax depending on the size of the withdrawals. This withholding tax is just a pre-payment of your annual taxes, it is not a penalty. RRSP account help you defer tax, you won’t avoid tax all together, just defer it until retirement.

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    • Advantages

    • Certain Withdrawals Can Be Made Without Paying Tax: First time home buyers can use the Home Buyers Plan (HBP) and people returning to school can use the Life Long Learning Program (LLP). These programs have limits on withdrawals and require repayment over a period of 15 years.
    • Benefit of having an RRSP account is that it allows to make a contribution, get a tax refund, and then withdraw that money using HBP and LLP without paying tax.
    • Withdrawals Can Be Made At Any Age: One huge benefit of RRSPs is that they allow withdrawals before retirement. Because RRSPs allow withdrawals at any age they work extremely well for early retirees.
    • Contributions Are A Tax Deduction: A little-known benefit, RRSP savings are protected from creditors, this includes claims from lawsuits or bankruptcy. This benefit isn’t available for TFSAs or RESPs both can be seized to cover personal liabilities.
    • Tax Free Compounding: A Massive benefit of RRSPs is that any investment made inside an RRSP will grow tax free. This lets your investment compound much faster without drag of annual taxes.
    • Potential for A Lower Lifetime Tax Rate: Along with tax free compounding, another Massive benefit of an RRSP is that you can lower your average lifetime tax rate. Contributions can be made during high tax years and withdrawals can be made in low tax years.

    Disadvantages

    • Withdrawals Will Impact Income Tested Benefits: RRSP withdrawals can impact government benefits in retirement. This can lead to claw backs on OAS (Old Age Security)or GIS (Guaranteed Income Supplement). This is a big drawback for low income families.
    • Contribution Room Is A Scarce Resource: RRSP contribution room will never come back. Unlike a TFSA, if you make a RRSP withdrawal that contribution room is gone, you will not get it back the following year.
    • Contribution Room Is Based On Income: RRSP contribution room is based on your gross income. In low income years you’ll accrue less contribution room. TFSAs on the other hand always accrue the same amount of contribution room regardless of income.
    • Less Flexibility To Share Available Contribution Room: Spouses cannot contribute to each other’s RRSP. RRSP contributions can only be made using your own earned income.
    • Mandatory Withdrawals At Age 72: By the end of the year you turn 71, RRSPs much be converted to RRIF (Registered Retirement Income Fund) which has prescribed withdrawal rates. These minimum withdrawals must be made regardless if you need the income or not.

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