What Is a Registered Retirement Savings Plan (RRSP)?

A Registered Retirement Savings Plan (RRSP) is a retirement savings and investing vehicle for employees and the self-employed in Canada. Pre-tax money is placed into an RRSP and grows tax-free until withdrawal, at which time it is taxed at the marginal rate. Registered Retirement Savings Plans have many features in common with 401(k) plans in the United States, but also some key differences.

The growth of an RRSP is determined by its contents. Simply having money in an RRSP is not a guarantee that you may retire comfortably; however, it is a guarantee that the investments will compound without being taxed, as long as the funds are not withdrawn.

Understanding Registered Retirement Savings Plans (RRSP)

Registered Retirement Savings Plans were created in 1957 as part of the Canadian Income Tax Act. They are registered with the Canadian government and overseen by the Canada Revenue Agency (CRA), which sets rules governing annual contribution limits, contribution timing, and what assets are allowed.

RRSPs have two main tax advantages. First, contributors may deduct contributions against their income. For example, if a contributor’s tax rate is 40%, every $100 he or she invests in an RRSP will save that person $40 in taxes, up to his or her contribution limit. Second, the growth of RRSP investments is tax-sheltered. Unlike with non-RRSP investments, returns are exempt from any capital gains tax, dividend tax, or income tax. This means that investments under RRSPs compound at a pre-tax rate.

 

In effect, RRSP contributors delay the payment of taxes until retirement, when their marginal tax rate will be lower than during their working years. The government of Canada has provided this tax deferral to Canadians to encourage saving for retirement, which will help the population rely less on the Canadian Pension Plan to fund retirement.

 

There are a number of RRSP types, but generally, they are set up by one or two associated people (usually individuals or spouses).

 
  • Individual RRSP it set up by a single person who is both the account holder and the contributor.
  • Spousal RRSP provides benefits for a single spouse and also a tax benefit for both spouses. A high-earner (spousal contributor) may contribute to a Spousal RRSP in their spouse’s name (the account holder). Since retirement income is divided evenly, each spouse can benefit from a lower marginal tax rate.4
  • Group RRSP is set up by an employer for employees and is funded with payroll deductions, much like a 401(k) plan in the U.S. It is administered by an investment manager and affords contributors the advantage of immediate tax savings.
  • Pooled RRSP is an option created for small business employees and employers, as well as the self-employed.
 

Approved Assets

Several types of investment and investment accounts are permitted in RRSPs. They include:

 
  • Mutual funds
  • Exchange-traded funds
  • Equities
  • Bonds
  • Savings accounts
  • Mortgage loans
  • Income trusts
  • Guaranteed investment certificates
  • Foreign currency
  • Labor-sponsored funds
     

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          945+ Reviews

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          Maria Marlin Retired Govt Officer, ON, Canada

          Very helpful fully explaining the different plans. Cash value is accessed via policy loans, which accrue interest and reduce cash value our valuable items.

          Client Logo
          Maria Marlin Retired Govt Officer, ON, Canada

          Very helpful fully explaining the different plans. Cash value is accessed via policy loans, which accrue interest and reduce cash value our valuable items.