What is a RRSP? Part 1

Article by Stephen Maser of Raymond James

RRSP stands for Registered Retirement Savings Plan and there are a lot of misconceptions surrounding this type account and how they work.  In this article I will explain how exactly they help Canadians in retirement planning, how they use deferral of taxes on the growth of your investments and what they should not be used for.

Opinions of RRSP accounts can differ greatly depending on who you ask.  Some investors will say that they are a terrible way to save and some believe that the money you take out of them is tax free.  Before opening a RRSP it is important to have a basic understanding of what they are and the proper use of them.

1. What is a RRSP – A RRSP is an investment account, not an investment.  This is very important to understand; especially when I hear investors say that “I bought RRSP’s this year”.  The money made from an RRSP is not only that you put money into one, but how the money was invested after contributing to it.  Some of the qualified investments for a RRSP are Mutual Funds, Stocks, Government & Corporate Bonds, GIC’s and ETF’s.
2. Tax Benefits – There are significant tax advantages in using RRSP’s.  The most obvious benefit is that you can deduct your contributions from your income.  There are limits based on your last year’s income, “pension adjustment” and deduction room carried forward from previous years but if you are most people, odds are you have plenty of contribution room available.  Another advantage is the deferral of taxes on the money you make in a RRSP.  Investments outside a RRSP (unregistered investments) are subject to taxes, if you have earned interest, dividends and capital gains.  Not having to pay taxes on the money you’ve made allows you to reinvest the cash that would have otherwise gone to the government.
3. Think Long-Term – RRSP accounts are terrible vehicles for short term savings.  It is important to realize if you have short term savings needs there are fees and taxes associated with pulling money out of them without due consideration.  If you are in a dire need for money, your RRSP should be your last resort.

These are of course the very basics of RRSP’s and their usefulness.  Don’t just think of them during “RRSP season” or when you are worried about your tax bill.  If used properly, this type of account can be one of the most effective ways of saving for your retirement.  If you are interested in having a detailed review of your RRSP’s, I offer reviews at no charge.

Disclaimer: The opinions expressed in this article are those of Stephen Maser and not necessarily those of Raymond James Ltd. (RJL). Statistics, factual data and other information are from sources RJL believes to be reliable but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond RJL is to be under no liability whatsoever in respect thereof. It is for information purposes only. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. Securities are offered through Raymond James Ltd., member CIPF. Financial planning and insurance are offered through Raymond James Financial Planning Ltd., which is not a member CIPF.