What is an RRSP?
A registered retirement savings plan (RRSP) is a type of savings account specially designed to help Canadians save for their retirement.
It comes with tax advantages that let you save and grow your money now, while deducting your RRSP contributions from your current tax bill.
When it’s time to take your money out, you’ll pay taxes on the withdrawal amount, but likely at a much lower rate than what you’d pay today.
How does an RRSP work?
You can open an RRSP at any financial institution and use it to hold a variety of investments, such as:
- segregated funds,
- mutual funds,
- GICs,
- stocks,
- bonds and more.
With RRSPs, you won’t have to pay taxes on any investments growing in the account – at least, not until you start withdrawing funds from it. Plus, your contributions are tax deductible. This means that you can use your contributions to lower your current taxable income.
You can contribute to your RRSP at any time until you reach December 31 of the year in which you turn 71. This is provided you have contribution room available
When you’re ready to take your money out of your RRSP, you’ll pay taxes on the withdrawal amount, but likely at a lower rate than what you’d pay today. For many Canadians, withdrawing from your RRSP at a later point in life – in your 60s or 70s – means paying much less tax.
As an example, let’s say you’re planning on retiring at age 65. At this point, you’ll likely earn less income than you would during your working years, which puts in you a much lower tax bracket. So, you’ll be paying less tax when you withdraw from your RRSP at that age, all the while helping to lower your current tax bill.