RRSP: What Is It And Should You Have One?

A Canadian RRSP (Registered Retirement Savings Plan) is a tax advantaged investment plan. Anyone who is resident in Canada can contribute funds to an RRSP if they have earned income. The mechanics of the plan are that you get a Canadian income tax deduction for the contribution you make to the RRSP and you do not pay Canadian income tax on the income earned inside your RRSP until you make a withdrawal from the plan.

This means that the RRSP increases in value much more quickly than investments which are not in an RRSP because there is no tax paid on the income earned each year inside the plan. The main assumption of the RRSP is that you will be able to invest your RRSP contributions in something, stocks, bonds etc. that actually increases in value. An RRSP is just a way of holding investments it is not an investment itself. You can choose to put nearly anything in an RRSP from gold mining stocks to savings accounts. Many people hold mutual funds in their RRSP's in order to get some diversification.

There are limits and maximums to the amount you can contribute, of course. You can contribute 18% of your last years earned income to an annual maximum of $22,000. The contribution room is cumulative. Your Canadian notice of assessment shows how much contribution room you have each year and it is wise not to exceed that limit. The notice of assessment is the form you receive from Canada Revenue Agency each year after you file your income tax return. Sometimes it comes to you with a cheque attached other times they ask for more funds. There is a box on the bottom of this form that is called RRSP Contribution room. There is a calculation on the form that tells you what your contribution room is, in other words how much you can contribute to the plan.

The Canadian RRSP has become less popular because the financial market meltdown of 2008 has left many people with a reluctance to invest in anything! So if you are not contributing to an RRSP what are you doing about retirement planning? An RRSP is still a good option as it does allow for tax free accumulation of retirement assets.

I intend to work until I am 80, which means that I do not need as much money invested to fund my retirement years and I also have more years left to invest. However not everyone enjoys what they do as much as I do.

So what is your retirement plan? Don't get pushed into an RRSP contribution or any investment unless you understand what you are purchasing and the potential tax advantages and disadvantages.

Debi J. Peverill CA is an accountant with a sense of humour. She has written 11 books for business owners and is in demand as a speaker. Learn more business strategies at http://www.peverill.ca/