What is a RRSP?
A Registered Retirement Savings Plan (RRSP) is a personal savings account registered with the Canadian government to help individuals accumulate capital on a tax-deferred basis for their retirement. The objective is to help individuals grow their savings in a tax free environment to secure an income during retirement years.
Who is eligible? You are eligible to open a RRSP if you:
- Are a Canadian resident
- Have a valid Social Insurance Number (SIN)
- Are 71 years of age or under
- Have an income
- Filed a Canadian tax return in the previous year
There are various types of RRSP including: individual, spousal, group, and pooled RRSP each with its own benefits.
Nevertheless, they all share one common advantage, and that is the tax benefits. Contributing to a RRSP account allows significant tax benefits when your income is at its highest. The total amount contributed to your RRSP in a given tax year is deducted from your taxable income for that year, reducing the amount of tax payable.
Consider two friends: Joanne and Alan who earn $35,000 a year and have a marginal tax rate of 26%. Alan ends up paying fewer taxes than Joanne because of his RRSP contributions.