RRSPs – The basics

Registered retirement savings plans, commonly known as RRSPs, were first introduced in 1957 to assist self-employed individuals and employees who weren’t members of a registered pension plan (RPP) help save for their own retirement.

Quite simply, an RRSP is an investment plan registered with the Canada Revenue Agency (CRA), which holds investments for your benefit.

There are essentially two significant benefits that make contributing to an RRSP a worthwhile part of your overall financial plan.

The first is the immediate tax savings resulting from a contribution to an RRSP. Subject to some limitations that will be discussed later, contributions made during the year – and within the first 60 days of the following year – can be used as a deduction from income when your tax return is filed.

This deduction will result in immediate tax savings equal to your marginal tax rate, which could be as high as 48% (however, this rate will vary by province and income level).

The second major benefit of contributing to your RRSP is the tax-deferred savings.

The investments inside the RRSP may earn income, such as interest, dividends or capital gains. However, the earnings inside the RRSP remains tax sheltered until they’re withdrawn from the plan at, which time, they’ll be taxable as income.