RRSP Benefits and Features

RRSP is short for Registeryoung couple talking about RRSPed Retirement Savings Plan. In Canada you are allowed to save some of your earnings in an RRSP from your pre-tax income. Canadian government encourages Canadians to save for your retirement. 

As an example this young couple in the image should start thinking about investing in RRSP. It is best to start as early as possible to get the most benefit from compounding effect. But it is dependent on ones income and other liabilities. 

               You are allowed to save up-to 18% of your earned income in the previous year or the maximum amount allowed for the year. For 2020 the maximum amount allowed is $27230.

If you are a member of a pension plan your pension adjustment will reduce the maximum amount allowed for you.

When can I open an RRSP?

You can open an RRSP account at any age before age 71 as long as you have an earned income.

Tax advantages for contributing to an RRSP.

  • Tax Deductible contributions: You get immediate tax advantage by deducting your contributions from your income. So essentially you are saving for retirement with pre-tax dollars.
  • Tax sheltered growth: Any income your savings earn in the RRSP is sheltered from taxes as long as it stays in the plan.
  • Tax deferral: Taxes are deferred till you take the money out of the RRSP. That means for most people they don’t pay any tax on the income till retirement. The amount of tax you will pay will depend on your tax bracket at that time. If you are in a lower tax bracket you may pay only a small amount or no tax on your withdrawal.
  • Home Buyers Plan HBP: You are allowed to borrow upto $25000 from your RRSP to help buy or build a qualifying home. The money borrowed under the HBP plan has to be paid back into the RRSP as per the rules set by the government. If the money is not paid back to that account, then the withdrawls are added back to your income. Then you will have to pay income tax just like your regular income. More on the HBP plan in another post.
  • Lifelong Learning Plan ( LLP ) LLP allows you to withdraw from your Registered Retirement Savings Plan to help fund full time education. You may use that money to finance fulltime education for you or your spouse or commonlaw partner. More on LLP in another post.

What type of investments can I buy in the RRSP?

Most any type of investment qualifies to be held in an RRSP such as:

  • Cash
  • GICs
  • Savings bonds
  • Government bonds
  • Gold and Silver bars
  • Mutual Funds
  • Segregated Funds
  • Stocks
  • ETFs
  • Mortgage backed securities
  • Income Trusts

              You can’t hold personal property such as Art or jewellery or precious metals etc. You are also not allowed to hold commodity futures contracts in RRSP. There are some other investments that are also prohibited to be in an RRSP. Those will be detailed in another post at a later date.

How to open an RRSP account?

You can open an RRSP with an Life insurance company if you want to invest in Segregated funds.

You can also open an RRSP with other institutions like:

  • Banks and Trust companies
  • Credit unions
  • Mutual fund companies
  • Investment firms ( for self directed RRSPs )

How long can I keep the RRSP account open

               You must close your RRSP in the year you turn age 71. You do have the option to convert your RRSP to a RRIF or buy an annuity. You may also take your RRSP in cash. RRIF and Annuities will be discussed later in another post.

Other Links and Resources

This page discusses some details about Segregated funds.

Here is a link to a page and a short video that discuses Seg fund fees and benefits.

This video on Canadian government site offers some education on saving and investing