Build Your Wealth With Tax Savings - Registered Retirement Savings Plan (RRSP)

Build up your savings with RRSP

In nowadays, I'm not sure how reliable is one's retirement plan, if one is solely relying on the public pension plans. To encourage Canadians to plan and save for their own retirement, the federal government has introduced the Registered Retirement Savings Plan (RRSP) many years ago.

This plan has many features that gives investors great incentives to save for their retirement.

• Investments compound tax-deferred as long as they remain in the plan
• Contributions are tax-deductible
• Choose your investments from a wide range of options

Tax deferral withi RRSP

Most fundamentally, the growth on investments within an RRSP is tax-deferred, therefore you don't annually pay tax. Any interest, capital gains or dividends earned will compound tax-deferred. The longer and more money stays in the account, the more the compounding growth effect. Money is only taxed - as income - when you remove it from the plan.

RRSP Contributions are tax deducted

You get a deduction from the annual taxable income you earn for every dollar you contribute to your RRSP. For example, suppose your taxable income is $60,000 and you contribute a $10,000 into your RRSP. Therefore, your taxable income will be reduced to $50,000. Since Canada is running on a progressive tax system (the higher your income, the higher your marginal income tax rate), higher income earners would have greater tax savings when contributing into RRSP.

How much can I contribute to my RRSP?

You can contribute up to 18% of your earned income to a maximum of $22,450 in the 2011 tax year (minus pension adjustments from your company pension plan). The 2012 maximum is $22,970. If you don't contribute the maximum amount that you're allowed, you can carry forward the unused portion indefinitely. If you are unsure how much you could contribute, the maximum contribution amount for the current year can be found on your Notice of Assessment from the CRA. You could also double-check with the CRA, their number is 1-800-959-8281

When is the RRSP contribution deadline?

The deadline falls 60 days after the end of the year. If that day falls on a weekend, the CRA may extend the deadline to Monday. However, I strongly do not advice to leave it until the deadline to make your contribution. Afterall, investment decision should be carefully planned, and not be made in a rush. Rather than making a lump sum deposit, you could consider doing a monthly contribution. This way you would reduce the risk of buying investment at the high price and this strategy is called dollar-cost-average.

What can I include in my RRSP investment portfolio?

Many people misunderstand that RRSP is an investment, but it is actually an account. You could visualize it as a container, within this, you may put in different kinds of investments. You can hold mutual funds, equities, bonds, GIC, cash and a variety of other investments in your registered plan. Before you make any investment decision, make sure you understand your objective and risk tolerance.

Written by: Samuel Li

Disclaimer:
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