Registered Retirement Savings Plan (RRSP)
A Registered Retirement Savings Plan is, as the name suggests, a plan that is registered with the Canada Revenue Agency (formerly known as the Canada Customs and Revenue Agency, or Revenue Canada before that) to help Canadians to save for retirement. But although practically everyone has heard of RRSPs, they are greatly misunderstood.
Think of an RRSP as a special kind of tax-free zone for long-term savings. It’s a way of diverting a portion of your before-tax income into a plan where it can stay and accumulate earnings without paying income tax until you make withdrawals later – presumably
in retirement when you are in an equal or lower tax bracket. You can have more than one RRSP, though it’s better to have fewer for ease of management and to minimize fees.
Put time on your side
Once in a plan your assets grow tax-sheltered and can grow much more quickly. For example, if you invested money into an RRSP and an equal amount outside an RRSP in an interest paying investment, your RRSP would double in almost half the time if you were in the top marginal tax bracket. We can help you invest in a wide variety of RRSP options including both guaranteed- and variable-rate products.
As to what you should invest in, consult one of our financial advisors. If you don’t have a company pension plan, you may want to be more conservative. If you’re not far from retirement, you may also want to be more conservative. The choice is yours and we can work with whatever level of risk tolerance makes sense for you.
Consistency, consistency, consistency
We advise people to automatically “pay yourself first”, before other bills and commitments. It’s just easier to put $200 a month into an RRSP than to come up with $2,400 once a year.
Monthly saving also allows you to dollar-cost-average your purchases – the same $200 will buy more units of an investment fund when unit prices are low, and fewer units when prices are high. It’s a way of smoothing out market fluctuations over the long term, and less likely to be caught out by either market corrections or missed buying opportunities.
Alternatively, if you want to make an RRSP contribution, but your income varies, or you don’t have cash, we can arrange an RRSP loan, which might make sense as a sort of “forced saving” – talk to your Orr representative to see if the numbers make sense.
Since contributions are income-deductible, they’ll be more valuable to people with higher taxable incomes. For example, if your annual income is $50,000 and you contribute $5,000 to an RRSP, the year’s income tax would apply to $45,000. Since your employer is obliged to deduct and remit taxes on your behalf at the $50,000 gross income level (with some exceptions, such as company-sponsored RRSPs) this typically results in a rebate at tax time. The higher your income, the larger your refund.
Higher and lower taxes
You can continue to contribute to an RRSP until the end of the year in which you turn 71, provided you still have earned income. At that time, you must begin to withdraw your RRSP in the form of an income. There are various choices for this and we’d be happy to help you determine which is the most appropriate for you