Registered Retirement Savings Plans (RRSP'S)

What is an RRSP?
An RRSP is short for Registered Retirement Savings Plan. It's a well-known phrase for good reason: an RRSP is one of the best ways to save for your retirement and save on taxes at the same time.

Some people think that an RRSP is an investment or something that you purchase. It's neither. An RRSP is a government-approved account specially designed to help you save money for your retirement.

Tax deductible contributions
The amount you contribute to your RRSP can be claimed as a tax deduction. For example, if you earn $40,000 annually, a $1,000 contribution can result in a tax refund of about $312. 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

Should everyone have an RRSP?
This depends largely on the member's age, income and other details of their financial situation. Certainly for middle-age people who have paid off big debts and for upper-income people, the consensus among financial planners is clear: RSPs provide indisputable benefits.

Even if they have debts, young people should consider investing in RSPs because it is better to start a plan earlier than later. The longer an RSP fund can accumulate interest or dividends, the bigger the fund will be when the time comes to draw on it for retirement.

What is the contribution deadline?
Contributions must be made within the first 60 days of the new year in order to be deductible for the previous tax year.
The deadline for making 2006 RRSP contributions is March 1, 2007

Spousal RRSPs
When members are considering their RSP needs, one of the most important things to consider (especially when they are nearing retirement) is how their and their spouse's income will be taxed after retirement. If it looks like one spouse is going to be taxed at a very high rate and the other spouse will be taxed at a very low rate, it makes sense for members to take action now to equalize their retirement income as much as possible so that the combined household income will be taxed at a moderate rate.

Annual contribution limits
As you might expect, the government sets limits on the amount you can contribute. You're allowed to contribute up to 18% of your earned income from the year before to a maximum of $16,500. (If you're company has a pension plan, your maximum contribution limit will be lower.)

For example, if you earn $50,000 this year, then you are entitled to contribute about $9,000 to your RRSP for the next taxation year.

Because anyone with earned income can contribute to an RRSP, you should file a tax return even if you owe no tax on your income. Doing so allows you create something called "RRSP contribution room." You can use the contribution room in later years when you start putting money in your RRSP. Saving the contribution until you are in a higher tax bracket will make your tax refund that much larger.

You can make part or all any RRSP contribution to a plan in your spouse's or common-law partner's name. As the contributor, you are still entitled to the tax deduction.

How does an RRSP provide Retirement Income?
Regular contributions to an RRSP will result in a substantial accumulation of savings. When you desire income, you can invest your savings in a Registered Retirement Income Fund (RRIF). RRIFs provide an income that can last for the lifetime of you or your spouse.

There is no longer any minimum age for the purchase of a retirement income, except with most locked-in RRSPs and LIRAs. You must purchase your retirement income before the end of the calendar year in which you turn 69.