Registered Retirement Savings Plan - RRSP

Registered Retirement Savings Plan - RRSP

A legal trust used to save for retirement. RRSPs are registered by the Canada Revenue Agency. Contributions to an RRSP are tax deductible, which makes contributions to RRSPs tax deferred until they are withdrawn. An RRSP can contain stocks, bonds, mutual funds, GICs, contracts and even mortgage-backed equity.

Because of their tax advantages, RRSPs are an important retirement savings instrument for Canadians. There are two main tax advantages of an RRSP:

1) Contributors deduct contributions against their income. For example, if a contributor's tax rate is 40%, for every $100 he or she invests under an RRSP will save that person $40 in taxes, up to his or her contribution limit.

2) Investments under an RRSP grow at tax sheltered. Returns on investments are exempt from any capital-gains tax, dividend tax or income tax. This means that investments under RRSPs compound at a pretax rate whereas normal investments' realized returns are taxed at least annually.

Notes:

RRSP contributors are delaying payment of taxes to a time when their marginal tax rate will be lower (during retirement) than it is during their working years. The Government of Canada has provided this tax deferral to Canadians to encourage retirement savings, which, in turn, will help the population to rely less on the Canadian Pension Plan to fund retirement.

See also: Capital Gain, Canada Revenue Agency, Compounding, Canadian Pension Plan - CPP, Guaranteed Investment Contract - GIC, Income Tax, Pension Plan, Registered Pension Plan - RPP, Registered Retirement Income Fund - RRIF, Tax Shelter