RRSPs: What are they?
What is an RRSP?
In 1957, RRSPs were introduced to motivate Canadians to put aside money for retirement. A registered retirement savings plan has tax advantages that allow deferral of income tax on the contributions. It also provides tax-sheltered growth on the accumulations/savings.
The term registered refers to the fact that the plan is registered as a tax-sheltered vehicle with the Canada Revenue Agency (CRA) and as such, it must comply with all criteria prescribed by the CRA under Income Tax section 146.
Contributions to your RRSP account (up to a RRSP specified annual limit) may be deducted from your annual income. These deductions reduce your payable income tax. All investment earnings inside the RRSP grow tax-free. Therefore, at the time of withdrawal from a registered plan, all income is treated as regular income for tax purposes, even if it was a registered investment that produced capital gains or dividends.
There are a variety of investment options available in the registered savings vehicles, ranging from conservative to aggressive. Some of the most common investments available are:
–Segregated Funds and/or Mutual Funds.
–Syndicated Mortgages, Linked Accounts, and Stocks.
–Guaranteed Investment Certificates (GICs), Bonds, Money Markets, etc.
Your financial goals and objectives alter throughout your life cycle. It is imperative for your financial plan to reflect these changes. Hence, the financial planning process should be repeated at least every five years to accommodate any adjustments. The best approach is to have a financial advisor provide you with the most suitable strategy for your specific needs by completing a financial needs analysis. It is extremely crucial to have an up-to-date and realistic plan in place for your retirement.
In the next TIP Center blog, we will discuss the different types of RRSPs.