What is a RRSP?
A Registered Retirement Savings Plan (RRSP) is a savings plan that is registered with the Canadian government. Contributions to your RRSP reduce your taxable income, which allows you to pay less tax now and build a larger retirement fund for the future.
What are the top benefits of having a RRSP?
- Tax deductions-Contributions reduce your taxable income, lowering the tax you pay so you can keep more in your pocket.
- Tax-deferral-Your investments grow, tax-deferred, while in the RRSP.
- Income splitting-Income-splitting can be achieved through a spousal RRSP which allows the higher income earning spouse to contribute to an RRSP in their spouse's name. This helps even out retirement income and lower your income taxes both now and in retirement.
- Life events-RRSPs can be used for more than just retirement. Canadian government programs allow you to access funds in your RRSP to help you buy your first home or pursue further education.
- Tax Savings - Investment income earned in a TFSA is tax-free. Withdrawals from a TFSA are tax-free as well.
- Carry Forward - Unused TFSA contribution room is carried forward and accumulates in future years.
- Re-contribute - Full amount of withdrawals can be put back into the TFSA in future years. Re-contributing in the same year may result in an over-contribution amount which would be subject to a penalty tax.
- Eligibility Unaffected - Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as Old Age Security, the Guaranteed Income Supplement, and the Canada Child Tax Benefit.
RRSPs vs TFSAs
|Primary purpose||Retirement savings, home purchase or education.||Saving for any purpose|
|Annual contribution limit||18% of previous year's earned income (maximum limits apply), less pension adjustments||TFSA|
|Unused contribution room||Carried forward||Carried forward|
|Withdrawals||Money taken out is taxed as income at your marginal rate. |
Withdrawals are counted as income and may affect federal income-tested government benefits such as Old Age Security
|You're not taxed on withdrawals. |
They do not affect federal income-tested government benefits such as Old Age Securit
|Withdrawn amounts||Contribution room is lost for amounts you withdraw||Added to contribution room in future years|
|Plan maturity||End of year when you turn 71||None; no upper age limit on contributions|
|Spousal plan||You can contribute directly to a spousal RSP||n/a|
|Eligible investments||You can hold savings accounts, GICs, mutual funds, stocks, bonds||You can hold savings accounts, GICs, mutual funds, stocks, bonds|
Many people ask us whether an RRSP is better or a TFSA. The answer is simple: It Depends on your situation and needs. Come talk to us about whether an RRSP or TFSA is the right option for you.