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Definition: Registered Retirement Savings Plan – RRSP
RRSP is a retirement savings plan provided by the government of Canada for holding savings and investment assets. Under RRSP, the contributions made are tax deductible and the income earned from such accounts are not taxed, and the taxes are deferred until the money is withdrawn from the account during retirement. But there are restrictions on the type of investment, maximum contribution and the time period of the investments. Assets that can be held under RRSP include savings account, guaranteed investment certificates (GIC), mortgage loans, income trusts, shares, foreign currency and labour sponsored funds.
• Contributions are tax deductible e.g. If a person invests $1000 in RRSP and his tax rate is 35%, the he saves $350 in taxes every year
• Investments are compounded at pre-tax rate
• Taxes are deferred until withdrawal, when the marginal tax rate will be lower than the tax rate during the investment period
• Provides means for splitting income
Types of RRSP:
• Individual RRSP- associated with a single account holder
• Spousal RRSP- where a contributor contributes to RRSP in his/her spouse’s name. It provides a means of splitting income after retirement there by lowering the tax impact also.
• Group RRSP- where an employer arranges for employees to make contributions towards RRSP. Tax savings are realized immediately rather than during the end of the year.
• Pooled RRSP- includes pooled plans for self-employed, small businesses and workers in the unorganised sector
The RRSP contribution limit for the past 5 years is shown below
Before an account holder turns 71, the RRSP must be either cashed out or transferred to a Registered Retirement Income Fund (RRIF). Amounts withdrawn are taxable during that particular financial year. But there are 2 exceptions to this, RRSP allows certain amount to be withdrawn before the retirement period under the Home Buyers Plan and the Lifelong Learning Plan and such withdrawals are not taxable.
The Canadian government has provided this plan in order to encourage retirement savings which will in turn make people less dependent on Canadian Pension Plan which is funded by the government.