RRSPs: What are they?

What is an RRSP?

In 1957, RRSPs were introduced to motivate Canadians to put aside money for retirement. A registered retirement savings plan has tax advantages that allow deferral of income tax on the contributions. It also provides tax-sheltered growth on the accumulations/savings.

The term registered refers to the fact that the plan is registered as a tax-sheltered vehicle with the Canada Revenue Agency (CRA) and as such, it must comply with all criteria prescribed by the CRA under Income Tax section 146.

Contributions to your RRSP account (up to a RRSP specified annual limit) may be deducted from your annual income. These deductions reduce your payable income tax. All investment earnings inside the RRSP grow tax-free. Therefore, at the time of withdrawal from a registered plan, all income is treated as regular income for tax purposes, even if it was a registered investment that produced capital gains or dividends.

There are a variety of investment options available in the registered savings vehicles, ranging from conservative to aggressive. Some of the most common investments available are:

–Segregated Funds and/or Mutual Funds.
–Syndicated Mortgages, Linked Accounts, and Stocks.
–Guaranteed Investment Certificates (GICs), Bonds, Money Markets, etc.

Keep In Mind

RRSPs are only an investment vehicle to get you from now to retirement more efficiently. Investment strategy, return on your investment, and the investment fluctuations may have nothing to do with the registered aspect of that account. There are certain guidelines defined by the CRA that need to be satisfied in order for an investment to be eligible as an RRSP account – other than that same investment (I.e. a 5-year GIC) with the same return can be placed in a registered or non-registered account.

Best Approach

Your financial goals and objectives alter throughout your life cycle. It is imperative for your financial plan to reflect these changes. Hence, the financial planning process should be repeated at least every five years to accommodate any adjustments. The best approach is to have a financial advisor provide you with the most suitable strategy for your specific needs by completing a financial needs analysis. It is extremely crucial to have an up-to-date and realistic plan in place for your retirement.

Financial_road_map

In the next TIP Center blog, we will discuss the different types of RRSPs.