Understanding RRSPs
Not sure what all the buzz is about when it comes to RRSPs? The information below should help explain some of the major benefits that come with this type of savings plan.

Tax deductible contributions

The amount you contribute to your RRSP can be claimed as a tax deduction. (There are some restrictions. More about those later.) For example, if you earn $40,000 annually, a $1,000 contribution can result in a tax refund of about $307. The higher your income, the higher your tax bracket and the larger the refund you’ll get for the same $1,000 contribution.


Tax-deferred compound growth

The money you earn on your contributions stays in your RRSP. You don't pay tax on it until you take it out of the plan. Even though you can withdraw RRSP money whenever you like, the idea is to keep your money in the plan until you retire. In most cases, withdrawals are treated as income, which means you'll pay tax on the money.

An RRSP is an ideal way to harness the power of compound growth.

Annual contribution limits

You may contribute to your RRSP until December 31 of the year in which you reach age 71. The amount you can contribute is determined by the "earned income" you report on your tax return. (Earned income includes salary or wages, alimony received, and rental income, among other income sources, but does not include items such as investment income.)

Your new annual contribution room is 18% of your previous year's "earned income", up to an annual limit.

Anyone with eligible earned income earns "RRSP contribution room", you should file a tax return even if you owe no tax on your income. You can use this room in later years or immediately to put money in your RRSP. Click here to learn more about RRSP carry-forward.

You can put part or all of your RRSP contributions into a plan in your spouse's or common-law partner's name. You can click here to learn more about spousal RRSPs.


Retirement income source

Like most good things, your RRSP will eventually come to end. In the year you turn 71, you need to convert or collapse your plan. Don't worry about getting a big tax bill. You have a number of retirement income options that allow your retirement savings to continue to grow in a tax-sheltered environment. Only payments to you from your plan are immediately taxed. So you can spread the tax on withdrawals over your retirement years.

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