A quick overview of an RRSP

Updated: Jun 22, 2021

A registered retirement savings plan (RRSP) is an account designed to help Canadians save for retirement. The money in an RRSP can be used to buy a whole host of eligible investments—mutual funds, ETFs, stocks, bonds, and the like. While the investments are held in your RRSP, you won’t have to pay tax on any interest, dividends, or capital gains you earn.

Because RRSPs are registered accounts, they’re subject to certain rules. One of the rules is that you’re limited in the amount of money you can contribute to the account in any given year. For 2020, your contribution will be limited to 18% of your 2019 earned income, to a maximum of $27,230. You can also catch up if you didn’t max out your investments in earlier years; to find out how much you can contribute, check out the Notice of Assessment that you got after filing your taxes last year.

When you open an RRSP, the money you contribute is what’s called “pre-tax.” That means that you can subtract the amount you contribute from your income and pay less in income taxes. If you made $60,000 and you contributed $5,000 to your RRSP, you will pay tax on only $55,000 of income. You will eventually have to pay taxes when you withdraw your money, but the idea is that when you do so, you’ll be retired and your tax rate will be lower.

While the government charges a hefty tax penalty to withdraw funds early (10% to 30% immediately but possibly adjusted when you file your taxes), they do make exceptions if you’re using it to buy a house or go back to school, as long as you put the money back within 10 years for education loans and 15 years for home purchases.

You will have to pay taxes on your withdrawals once you retire. Also, the government requires you to close your RRSP by the end of the year you turn 71 and use the money to buy a registered retirement income fund (RRIF) or an annuity.

Helping individuals and families in Edmonton achieve their financial goals is my passion. Preparing you for retirement is a key part of that. Contact me today to schedule your free consultation.

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