It is hard to believe we are only a few weeks from the March 3rd RRSP contribution deadline for 2024. A Registered Retirement Saving Plan (RRSP) is an investment account used to help Canadians pay less tax on their annual income while helping them save for their future.
Who is eligible to open an RRSP?
• Anyone under 71 who has earned and reported income in a previous year
• Must be a Canadian resident for tax purposes
• Has a Social Insurance Number (SIN)
How does an RRSP work?
When you contribute to your RRSP, the contribution is tax-deductible, and you defer paying tax on the money until it is withdrawn. Unless you’re withdrawing money through the Home Buyers Plan (HBP) and/or the Life Long Learners Plan (LLP), the money will be taxed as ordinary income in the year it’s withdrawn.
Like other registered plans, RRSPs can hold a wide range of investments, including mutual funds, ETFs, stocks, and bonds.
Pros and Cons
Pros:
• If you received a bonus that bumped you into a higher tax bracket, contributing to an RRSP will reduce your taxable income and, therefore, reduce the amount of tax you will have to pay on the additional income
• Contributing to your RRSP reduces your overall taxable income, which may result in a tax refund in April
• Any investment growth within the account is tax-sheltered until withdrawn
• Investing in an RRSP early gives you more time to grow your investments, reduces your taxes, and enjoy the benefit of compounding growth
Cons:
• RRSPs are intended for long-term investing, meaning if you need to withdraw money before retirement, you must include the withdrawal as part of your annual income. This could potentially put you into a higher tax bracket and result in higher income taxes.
• At age 71, you must roll the RRSP to a Registered Retirement Income Fund (RIFF) and start withdrawing annually. This could potentially take you above the Old Age Security (OAS) income threshold and cause you to lose some of your government benefits
• Contribution room is based on income, so if you are self-employed or have a low income, you may be limited as to how much you can contribute to your RRSP
If you would like to learn more about how an RRSP could be right for you, please don’t hesitate to contact us.
Have a great weekend,
Paige & Tracey
Source: https://www.fidelity.ca/en/investor-education/what-is-an-rrsp/
Photo by Bonnie Kittle on Unsplash
Products or services related to investments, investment recommendations, financial planning, retirement planning, and investment reviews are provided through our mutual fund dealer Security Financial Services and Investment Corp. 4665 Yonge Street, Suite 309, Toronto, ON M2N 0B4 t 416.964.0440