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It’s that time of year: RRSP 101

What is an RRSP? How can it help you retire comfortably?

Registered Retirement Savings Plans (RRSP) have been around since the 1950s, but many people still don’t know much about them or get them confused with other registered accounts.  This article will clear up the confusion and help you to decide if an RRSP is right for you. These are some of the typical questions we hear about RRSPs.

What is an RRSP?

The RRSP was introduced in 1957 to incentivize people to save for retirement, especially the self-employed and those without a company pension plan. It’s evolved to become a valuable retirement savings tool for many Canadians. The RRSP is a registered plan that provides tax-deferral and tax-shelter for your savings.

Why would I choose an RRSP?

A key reason to invest in an RRSP is that all contributions are tax-deductible. Any amount you invest in an RRSP reduces your net income for tax purposes. It will effectively lower the amount of tax you have to pay that year, bringing you a lower tax bill and a higher likelihood of a refund. Let’s say you earn $55,000 and put $6,000 into your RRSP. Your net income will be reduced to $49,000 for tax purposes.

Another big draw is that your RRSP investments grow tax-free. You won’t be taxed on any investment growth, including capital gains, interest and dividend payments. You keep all of your investments’ growth, which helps your savings to grow faster while in the RRSP account. When it comes time to retire, any withdrawals will be taxed, but this should happen at a lower tax rate given that you should have less taxable income when you retire vs. when you are working.

How much can I contribute to an RRSP and when is the deadline?

You can contribute up to 18% of your earned income, to a maximum amount of $29,210 for 2022. If you contribute to a company pension plan, the amount you can contribute will be less. You can find information on your contribution room on your latest notice of assessment from the CRA. March 1st, 2023 is the deadline to make a contribution that is deductible against your 2022 income. The RRSP remains a great place to park your retirement savings. If you’re still not sure if an RRSP is right for you, reach out to your financial advisor to learn more.

Melissa MacQuarrie, CLU, BBA
Partner/Financial Advisor, Love & Persson Group