The Benefits of Having a Registered Retirement Savings Plan (RRSP)

This year you have until Monday, March 1 to make an RRSP contribution that is eligible for a tax deduction against your 2020 income.

The RRSP contribution limit for the 2020 tax year is 18% of your 2019 earned income, up to a maximum of $27,230.  In addition, you can add any unused contribution room from prior years. To find your current personal limit, you should refer to the notice of assessment sent to you from CRA last year.

RRSPs have two main benefits: 1) The money you put in each year is tax deductible and 2) any growth or income you receive is allowed to compound tax-sheltered.

Because your contribution works as a tax deduction, it lowers your taxable income. Here’s a simplified example of how this works. Say you made $100,000 and your employer withheld the appropriate amount of tax on your pay. If you make a $10,000 RRSP contribution, it reduces your taxable income from $100,000 to $90,000. The difference between whatever tax would be payable on $90,000 and the amount of tax that was withheld on the $100,000 will come back to you in the form of a tax refund.

In addition to the tax savings upfront, the other major benefit of an RRSP is tax-sheltered growth. Because you’re not paying any tax on the income or growth, your wealth will grow a lot quicker as compared to holding investments in a non-registered investment account where you have to pay taxes along the way.

It’s important to note that an RRSP does not provide a permanent shelter from taxation, but rather defers income tax payable until a future date. What this means is that at some point in time you will withdraw money from it. And when money is withdrawn from the plan it will be included as taxable income. However, since this is a retirement fund, your taxable income will likely be much lower when you do begin to withdraw funds from the account.

I’ll be uploading a podcast with some other facts about RRSPs you may find useful on Thursday, Feb. 11. I hope you’ll have a listen.

Mark Shimkovitz is a financial advisor with Raymond James Ltd. The views of the author do not necessarily reflect those of Raymond James. This article is for information only. Raymond James Ltd. member of Canadian Investor Protection Fund.