A Registered Retirement Savings Plan (RRSP) can be a powerful financial tool for building retirement savings and enjoying tax benefits along the way. An RRSP can contain a variety of investments, allowing your money to grow tax-free until you’re ready to withdraw it. Read on to learn how an RRSP can lay the groundwork for a comfortable, stress-free retirement.

What is an RRSP?

An RRSP is a government sponsored, tax-advantaged retirement and savings and investment plan for eligible, working adults in Canada.

You build your RRSP account by investing pre-tax money directly from your paycheque. Each year, you can deposit a maximum of 18% of your income, up to the limit set by the Canadian Revenue Agency (CRA). If you don’t reach the maximum contribution limit, it rolls over into the next year.

By investing that money into a high-interest savings account or assets within your RRSP, you may multiply your savings. That’s where one major advantage of an RRSP account comes in. Growth is tax-deferred, whether it comes from interest or investment gains. Because you don’t owe taxes right away, you have the opportunity to grow your savings significantly.

Where can you open an account?

Some employers may offer access to an RRSP as part of their employee benefits package, which may also come with matching contributions. But even if your job doesn’t offer an RRSP, you can still open one at many financial institutions across Canada, including:

• Banks
• Credit unions
• Insurance companies
• Trusts

Types of RRSP

Several types of RRSP are available to accommodate different circumstances and priorities:

• Individual RRSP. An account set up by one person, who holds the account and makes all contributions. This is a standard RRSP.
• Spousal RRSP. An account that provides tax benefits for both halves of a married couple. If one spouse earns more money, they can contribute to a spousal RRSP in the other person’s name. That way, both spouses benefit from the tax advantages.
• Group RRSP. Often offered by employers, these are group savings plans where employers may match contributions. The convenience of payroll deductions makes it easy to contribute consistently to a group RRSP.

How does investing in an RRSP work?

When you open an RRSP, you can either work with a financial advisor to develop an investment portfolio based on your priorities and concerns, or you can choose each individual investment yourself with a self-directed RRSP. Either way, you have a wide range of assets and investment options to choose from, including:

• Exchange-traded funds
• Mutual funds
• Stocks
• Bonds
• Savings accounts
• Guaranteed investment certificates

While there are many investment strategies, you may want to consider an approach that balances risk and return. That might mean splitting investments between lower risk, steady options, like guaranteed investment certificates, and riskier options with higher potential reward, like stocks.

Who qualifies?

An RRSP has few eligibility criteria, making it an accessible option for many working people in Canada. There’s no age minimum for opening an RRSP. Anyone with earned income in Canada, who files a Canadian tax return, can open an RRSP.

However, you can only keep your RRSP account active until age 71.

Options for 71-year-olds

If you’re turning 71 with an open RRSP account, don’t panic. You have options:

• Withdraw funds. Keep in mind that any money you withdraw from your RRSP will be included as taxable income for that year.
• Transfer funds to a Registered Retirement Income Fund (RRIF). An RRIF is designed to provide you with steady income during your retirement. You can’t contribute to an RRIF, and you have to withdraw at least a minimum amount each year.
• Purchase an annuity. An annuity from a trusted financial provider can help you earmark retirement and long-term care costs.

What benefits does an RRSP offer?

• Immediate tax savings. The contributions that you make to your RRSP are tax-deductible, so they can reduce the income taxes you owe the CRA each year.
• Tax-deferred growth. All investments in your RRSP grow tax-free until you withdraw them; then they’re subject to your marginal tax rate, which may be lower than your current rate. This allows your savings to compound.
• Income-splitting opportunities. Spousal RRSPs allow for potential tax savings by splitting income in retirement.
• Flexibility for big expenses. While RRSPs are designed for retirement savings, you can also put your funds toward some other major costs. Programs like the Home Buyers’ Plan (HBP) and the Lifelong Learning Plan (LLP) let you borrow from your RRSP for a first home purchase or to fund your education.
  

  Is an RRSP right for you?

  The right retirement savings options for you depend on your financial circumstances, goals, and priorities. If you value flexible, accessible funds, an RRSP can help you save for a comfortable retirement.

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