Having an RRSP is one of the most tax-efficient solutions to fund your retirement. The Canada Revenue Agency sets out an annual maximum contribution amount based on a percentage of your income.
Key Features and Benefits
Every dollar you put towards an RRSP (within your specified contribution limit) reduces your earned income for that year. You get immediate tax deductions. This reduces the amount of tax you end up paying and is very beneficial if you are currently in a high tax bracket.
The growth in your RRSP is sheltered from tax. You don’t have to pay taxes on the interests, the dividends or the capital gains from your investments. Over the years, you could stand to have a lot more money in your pocket.
Let’s say, for example, you are in the 41% marginal tax bracket. A $50,000 investment which earns a 6% average annual compounded rate of return would increase to $151,280 in 20 years.* *Illustration purposes only.
Another way to reduce your overall tax bill may be to make a spousal contribution. The higher-income spouse can contribute to the lower-income spouse’s RRSP. The spouse who is contributing will always get the tax deductions.
You can check out how much you can contribute by looking at your Notice of Assessment. The government deducts your contributions from your income for that year and your investments in an RRSP grow protected from taxes. Eligible investments can include, cash, guaranteed deposits, mutual funds, stocks and of course bonds. You can withdraw from your RRSP provided it is not locked-in. The amount you take out is then added to your income in the year the withdrawal was made, and tax is withheld.