How the RRSP Works | Summary and Q&A

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February 2, 2019
by
Ben Felix
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How the RRSP Works

TL;DR

Learn how the Registered Retirement Savings Plan (RRSP) works in Canada, its benefits and misconceptions, and how it can be used as a retirement planning tool.

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Questions & Answers

Q: How does the RRSP work?

The RRSP is an account where contributions are tax-deductible, investment growth is tax-free, and withdrawals are taxed at retirement.

Q: How is RRSP contribution room determined?

Contribution room is based on earned income, with 18% of the previous year's income being added to the RRSP limit for the following year.

Q: Can contributions to the RRSP be deducted in a future year?

Yes, contributions made within the first 60 days of the following calendar year can be deducted from taxable income in that year or a future year.

Q: Are there any penalties for early RRSP withdrawals?

While there are no explicit penalties, early withdrawals result in permanent loss of contribution room and taxes must be paid on the amount withdrawn.

Q: Is the RRSP a good investment option for long-term growth?

The RRSP is best used for holding long-term investments like stock and bond ETFs, as it allows for tax-free growth.

Q: How does the RRSP compare to the TFSA?

The decision to use the RRSP or the TFSA depends on factors such as current and expected future tax brackets, with the RRSP potentially providing better after-tax results for those in higher tax brackets during retirement.

Q: Should individuals with pensions contribute to an RRSP?

Individuals with pensions can still benefit from the RRSP if they expect to be in a lower tax bracket during retirement, especially if they have a spouse with a lower income to split pension income with.

Q: What should be considered when investing in the RRSP?

Pre-tax and after-tax asset allocation should be considered, and holding U.S. listed equities in the RRSP can help avoid withholding tax on dividends.

Summary & Key Takeaways

  • The RRSP is a special type of account in Canada that offers tax benefits and allows for tax-free growth of investments.

  • Contributions to the RRSP can be deducted from taxable income, and withdrawals are included in taxable income at retirement.

  • Common misconceptions about the RRSP include penalties for early withdrawals and the belief that it is an investment itself, rather than an account.

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