What is a Registered Retirement Savings Plan?

Preparing for retirement means ensuring you have ample income long after you have stopped working. So where will the money come from? With careful planning a Registered Retirement Savings Plan could be the answer. Here's how.

A Registered Retirement Savings Plan (RRSP) allows you to put money away for retirement in an account where the investment gains are tax free and the contributions you make towards it are tax deductible.

• The advantage is you will only pay tax on your registered savings when you start withdrawing, at which point the amount of tax you owe the government is likely to be lower since you’ll be earning less income in retirement.

You can keep contributing to an RRSP until December 31st of the year you turn 71, but will then have to wind it up and open a Registered Retirement Income Fund, or RRIF.

You can place most investments into an RRSP, including money, stocks, bonds, guaranteed investment certificates (GICs) and mutual funds.

• Typically, you would set up your account at a financial institution, and get a limit as to how much you can put in it for any given year.
• People who have a defined pension plan from their employer have less room to contribute than someone with no pension plan. In 2015, the maximum RRSP deduction limit was $24,930.

There’s an annual deadline for contributing to your RRSP, either at the end of February or beginning of March.

• In 2016, for example, the deadline for 2015 contributions was February 29 (remembering that 2016 is a leap year!)

There are tax penalties for taking money out of an RRSP early, with one exception.

• Under “The Home Buyer’s Plan,” you can withdraw up to $25,000 annually to build or buy a home, and pay that money back into your account in installments, starting the second year after you withdrew the funds.
• The money must be paid back within 15 years.

Registered Retirement Savings Plans give Canadians the opportunity to put money away for retirement while benefitting from a tax shelter, because contributions are tax deductible.

Although RRSPs are useful tools for many, if you’re a low-income earner in a lower tax bracket, you won’t see the same benefit as someone in a higher bracket.

• In those cases, an option like a Tax-Free Savings Account may be more suitable.

Smart Tip provided by The Financial Pipeline. Founded in 1996 by a group of portfolio managers, The Financial Pipeline is dedicated to providing financial knowledge and education to anyone and everyone with even a passing interest in finance. Our motto, “Financial Information For the Rest of Us,” speaks for itself.