A Registered Retirement Savings Plan (RRSP) is an account, registered with the federal government, that you use to save for retirement. There are a number of benefits to saving in an RRSP.
1. Contributions are tax deductible.
You claim your RRSP contribution as a deduction on your tax return. For example, if you’re in the top tax bracket in Ontario, every $1,000 you contribute reduces the tax you pay by approximately $535. And if your income is lower in a year, you can carry forward the deduction for your contribution to a future year when your income may be higher. That way, your tax savings are greater when you’re in a higher tax bracket.
2. Savings grow tax free.
You won’t pay any tax on investment earnings as long as they stay in your RRSP. This tax-free compounding allows your savings to grow faster.
3. You can convert your RRSP to get regular payments when you retire.
You can transfer your RRSP savings tax free into a RRIF or an annuity when you retire. You’ll pay tax on the regular payments you receive each year — but if you’re in a lower tax bracket in retirement, you’ll pay less tax. Make sure your RRSP fits into your overall financial and retirement plan.
4. A spousal RRSP can reduce your combined tax burden.
If you earn more money than your spouse, you can help build their tax-free savings by contributing to a spousal RRSP. Retirement income will then be split more equally between the two of you — which may reduce the total amount of tax you pay.
5. You can borrow from your RRSP to buy your first home or pay for your education.
You can take out up to $25,000 for a down payment for your first home under the Home Buyers’ Plan (HBP). You can also take out up to $20,000 to pay education costs for you or your spouse under the Lifelong Learning Plan (LLP). You won’t pay any tax on these withdrawals as long as you pay the money back within the specified time periods.
