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Registered Retirement Savings Plan (RRSP)
A RRSP is a tax shelter that allows Canadian taxpayers a way to save money for their retirement.\
- Are there advantages to a RRSP? RRSP's are deductible from income, and investment income earned within the RRSP fund is tax sheltered.
- How much is the reduction in tax from contributing? This depends on your tax bracket. In Saskatchewan, the highest income earners will save 44% while the average income earner will save approximately 35%.
- Is it really tax savings? The RRSP is a tax shelter, so income tax is deferred. When funds are withdrawn from the plan, they are taxable.
- How much can be contributed? There are limits to the amount that can be contributed. The current year's limit is 18% of income earned in 2011 to a maximum of $22,970, add to that any carryover amount of unused contribution room of prior years.
- When should contributions be made? Contribute any time during the last ten months of 2012 and within the first 60 days of 2013. Therefore, March 1st, 2013 is the last day to contribute to an RRSP for the 2012 tax year.
- Is it wise to borrow the funds to contribute to an RRSP? Can you afford the loan payments? The main reason Canadians do not contribute is affordability. Will the rate of return on the investment exceed the cost of borrowing? Interest on the loan is not deductible, so this may be difficult to achieve unless the funds are in a higher risk investment earning a greater return.
- When can funds be withdrawn? RRSP's should be viewed as a long-term investment. The purpose of the RRSP is for retirement, so the funds should remain in the plan until that day arrives. However, funds can be withdrawn anytime but are subject to tax. In the year you turn 71; RRSP's must either be withdrawn, transferred directly to a Registered Retirement Income Fund (RRIF) or purchase an annuity.
- Is an RRSP worthwhile? The intent is to provide for retirement, and that in itself is worthwhile. At retirement, there is the real possibility of paying less tax on the withdrawal amount than the tax that was deferred on contribution. Unless of course, if you have planned for alternative sources of income at retirement, the benefit of the RRSP can be diminished if it is taxed at higher rates.
*Be sure to review your current situation. Contributing to an RRSP may not be the best alternative for you. It may be advisable to pay down debt first or save in a Tax-Free Savings Account (TFSA). You should talk with your accountant or financial adviser to get an opinion on your specific situation.