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What is a Registered Retirement Savings Plan?

Retired couple biking down a street

October 23, 2019. A Registered Retirement Savings Plan (RRSP) is a tax-sheltered savings account for saving money for your retirement.

How do RRSPs work?

  • RRSP contributions are tax-deductible.
  • The earnings are taxed after they are withdrawn.
  • Your savings can be invested to provide income for retirement.
  • Withdrawals from your RRSP are taxed as you receive them when you retire.
  • Even non-residents can contribute to an RRSP.
  • You can contribute on your spouse’s or common-law partner’s behalf and still get the tax deduction.
  • You can contribute until the plan-holder turns 72.

How much can you contribute to your RRSP?

You are allowed to contribute a percentage of your income every year and can carry over the left-over room from previous years.

  • For 2018 you were allowed to contribute $26,230 or 18% of your earned income.
  • For the 2019 tax year, you are allowed to contribute 18% of your income or $26,500.

How much should you save for retirement?

The general rule for how much you should put away for retirement is that you should save about 10% of your salary before deductions and taxes.

You should save more than 10% if:

  • You start saving when you are older, 10% likely will not be enough and you will need to save more.
  • You plan on retiring early or plan to travel often.
  • Your investments are low-risk (which means they are low-return).
  • You will have debt when you retire.

Types of RRSPs

There are many types of RRSPs available for you to choose from.

Deposit-type RRSPs

  • Deposit-type plans are common and have options including guaranteed investment certificates, term deposits, and savings accounts.
  • Interest rates can be fixed, variable, or index-linked (linked to the stock market).
  • Terms range from daily to multi-year.
  • How frequently interest is calculated ranges from daily to end of term.
  • Early withdrawals may not be allowed.

Mutual funds

  • There are many types of mutual funds available.
  • RRSP-eligible equity funds invest mainly in stocks.
  • Money market funds hold investments such as corporate and government notes and treasury bills, which are short term securities.
  • Income funds invest mainly in longer-term bonds, dividend-paying stocks, and mortgages.
  • Balanced funds include all three investment types.

Self-directed

  • You make your own decisions about a wide range of investment options.
  • There are administration and transaction fees.
  • Self-directed plans are best for experienced investors who make large contributions.

Group RRSP plans

  • Matching contributions to a group RRSP is a common incentive given to employees by employers.
  • Group plans can have the same options for investing that other types of plans do.

Is an RRSP right for you?

Saving even a modest amount now will help you in the future. Your RRSP is an important investment, so talk to your financial advisor to find out what type of RRSP is best for you.

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