Five amazing benefits to RRSP

We have teamed up with Aislinn Bissenden a Wealth Manager from Integral Wealth to bring you five amazing reasons you should be making the most of your RRSP

What is an RRSP?

A Registered Retirement Savings Plan (RRSP) is a retirement saving and investing vehicle for employees and the self-employed in Canada that you can contribute to for retirement purposes.    

RRSPs have two main advantages.  First, any money you contribute to your RRSP can be deducted from your taxable income, which reduces the amount of tax you must pay.  Second, while your money remains within the RRSP all the growth is tax-deferred until you begin to withdraw the funds in retirement when your tax rate may be lower than during your working years.

How does it work?

You start earning RRSP contribution room once you start working and filing your taxes with CRA.  The maximum amount you can contribute to an RRSP any year is 18% of the income you earned the previous year up to a maximum, whichever is smaller.   Even if you don’t use the full amount of your available contribution room, you have the benefit of carrying this amount forward to be used in future years.

Contributions to an RRSP reduce your taxable income and may produce a tax refund which can then be used to pay down debt, save for a child’s education, or to pursue other financial goals. Once you’ve made your contributions you can then invest the money in a variety of financial products like stocks, bonds, mutual funds, or GICs, and any investment earnings you make are tax-sheltered until you withdraw the funds from that account.

You can contribute to an RRSP up to the end of the year you turn 71.  At that time, you must transfer your RSP to an RRIF or a Life Annuity which are designed to provide you with retirement income.

Main Benefits of Contributing:

• Tax reduction – contributions into an RRSP reduce your taxable income.  For example: Your taxable income is $75,000 and you contribute $10,000 into an RRSP.  Your taxable income drops down to $65,000 and you’re saved from paying taxes on the $10,000 this year.

• Tax Sheltered Growth – you don’t pay tax on any investment earnings in your RRSP until you withdraw the funds.  Compounding interest helps the funds within your RRSP grow at an expedited rate.

• Tax Deferment – The goal is to contribute to your RRSP during your higher income earning years when you’re in a higher tax bracket and then withdraw the funds once you have stopped working and are earning less income, so your money is taxed at a lower rate.

• Creditor Protection – In British Columbia, RRSP’s are fully protected assets from Creditors.

• Creating a pension for yourself in retirement.  Typically as a business owner, you do not have the luxury of having a company pension to rely on to help you pay for retirement.  By contributing regularly and choosing the right investments you are building financial stability for your future self. 

There are many ways you can take advantage of your RRSP. They are a flexible tool that can help you pay less tax and save for long-term goals.  To make the most of your RRSP, I always recommend you talk to an expert, someone who can look at your personal financial situation and help you create a strategy to achieve your goals.

The deadline for contributing to reducing your taxable income for 2021 is March 1, 2022.

A huge thanks to Aislinn for sharing her knowledge and understanding of RRSPs.