An RRSP is a government approved program that is designed to encourage Canadians to save for their retirement by providing powerful tax reduction options. The tax breaks come in two forms. The first is that once you set up an RRSP, the financial contributions you make are deductible from your taxable income.
The second tax advantage resides in the sheltering of the income and capital gains that are generated by the investments in your RRSP. Simply put, your money is allowed to grow tax sheltered. Anyone who has ever invested in a GIC (outside of an RRSP) knows that the interest earned is heavily taxed. Likewise, a capital gains tax is levied on investments like stocks and mutual funds. But all investments within an RRSP are effectively "sheltered" from tax and allowed to compound.
Apply the power of compounding
The power of compounding lies in the ability of your money to make money. Deferring taxes on your deposits and your earnings allows more money to stay invested to work for you. At time goes by the effect of compounding can be dramatic.
*Annual deposit $5,000 before tax ages 30 to 65.
*Assumes a $5,000 before tax deposit at the beginning of each year until age 64 for both the registered and the non-registered accounts at annual rate return of 6 %.
*Assumes marginal tax rate of 35 per cent.
Governments are broke. They quite simply do not have the resources to continue to support the growing number of retired Canadians who will be dependent on government-sponsored pension plans in the future. RRSPs are one method by which the federal government can encourage people to take responsibility for their financial future.
At the risk of providing too much of a good thing, however, the government has established limits as to how much an individual can contribute to an RRSP
on an annual basis. The yearly maximum allowable
contribution limit is currently 18% of the prior
year's earned income up to a maximum of $19,000.
Once you've determined the amount of money you can afford to put into your plan, the next decision must be where to invest. Fortunately, there is a plethora of options. Among them Canadian equities, international equities up to an allowable limit, mutual funds, Treasury Bills, bonds, stripped coupons, GICs and the list goes on. It is best to explore your options with us and we will happy to do so. After all, it's your money and your future