A RRSP (Registered Retirement Savings Plan) is a tax shelter provided under the Income Tax Act (Canada) to give individuals the incentive to save towards their retirement. By investing carefully and wisely, many Canadians enjoy a comfortable standard of living in their later years. An RRSP in itself, however, does not automatically guarantee this. It merely provides the vehicle.
By contributing to an RRSP (individual or group), you increase your savings in two ways:
- All RRSP contributions are deductible for tax purposes, subject
to certain limits. Whatever your eligible contribution, this money
can be deducted from your total earned income for the year, reducing
the amount of tax you pay, and more importantly, increasing the
amount of money you keep.
- Any income earned is not taxed. This means, that all monies
contributed to and accumulating in an RRSP, including all capital
gains and interest income earned, is left untouched by Revenue
Canada until withdrawn. Beginning in 1991, if you did not contribute your maximum amount
in any one year, you can carry forward the unused portion to subsequent
years. Confirmation of your RRSP contribution limit appears on
your previous year's Canada Revenue Agency Notice of Assessment.
- Although income is not taxed until you withdraw funds from your RRSP, in a perfect world you would own your capital gain and dividend investments outside of your RRSP as they are ultimately taxed at much lower rates than interest income, why pay twice as much tax as needed?
