RRSP's were created by the Federal Government in 1957, are one of the main pillars of Canada's retirement programs, and are structured in such as way as to give Canadians the incentive to save for their own retirement. Money contributed to a plan is 100% tax deductible against any other source of income. In other words the contributions made to an RRSP are in pre-tax dollars.
Every Canadian that files a tax return and declares earned income creates RRSP "room". The amount of room created is equal to 18% of earned income, to a certain maximum which changes every year. The maximum for 2011 is $22,450. This increases each year in the future based on the rate of inflation. If you do not contribute your maximum in a given year you can carry forward the amount to use in a future year.
There are a wide range of investments that you can purchase and own within an RRSP plan, including mutual funds, segregated funds, individual stocks and bonds, and more. Also, you can own as many RRSP's as you want with no restrictions; however It can be difficult to keep track of them if you have too many. Speak to your advisor for more information about what types of investments are eligible for RRSP's and whether they are appropriate for you.
There are a number of different RRSP plans that you can own as follows:
- Individual RRSP's - you must have contribution room, money is contributed to the plan, you get the tax deduction, and you pay the tax on any money withdrawn from the plan.
- Spousal RRSP's - the contributing spouse must have contribution room, money is contributed to the plan, the contributing spouse gets the tax deduction, and the spouse must pay tax on any money withdrawn from the plan (unless it is withdrawn in the first three years, then the contributing spouse pays the tax on money withdrawn).
- Group RRSP's - with these plans money is contributed to either of the above plans directly from your paycheque in pre-tax dollars. You can get more information about these plans on our Group RRSP page.
There are pros and cons to RRSP's as well as different planning techniques you can use to get the most out of them. Speak to your advisor for more information and visit to our Investment Calculators Page to use the RRSP calculators.