An RRSP (Registered Retirement Savings Plan) can be a great way for Canadians to save money for retirement. They have various advantages and disadvantages and some of them are discussed below.
First of all, the advantages:
- Your contributions to an RRSP are tax-deductible. You don’t pay tax until you withdraw from it. Hopefully you won’t have to withdraw any of the funds until you retire. Presumably you will be in a lower tax bracket by the time you retire and as a result you will pay less tax.
- Any income or capital gains earned from RRSPs is also tax deferred.
- You can split your retirement income by contributing to a spousal RRSP and as a result your household will pay less tax.
- RRSPs can be transferred from one financial institution to another and you can have more than one.
And now onto the disadvantages:
- Any funds you withdraw from the RRSP are taxed as income tax and not capital gains tax. (You only get taxed on 50% of capital gains.)
- When you make a withdrawal, your financial institution will withhold federal tax of 10% to 30% depending on the amount you withdraw.
- There are no tax credits that take effect for funds withdrawn from an RRSP. So, you wouldn’t be able to take advantage of the Dividend Tax Credit.
- You can’t use RRSPs as collateral for a loan.
Some RRSP Facts You Should Know:
- For an RRSP to apply to the current taxation year, you must contribute either during the calendar year or within 60 days after the end of the year.
- At the end of the calendar year that you turn 71, you must terminate your RRSP.
- The tax withheld by your financial institution may not be enough to account for the tax you owe at your tax bracket. You may end up having to pay more tax when you include the withdrawal on your tax return.
- If you over-contribute to your RRSP, the over-contribution amount is not tax deductible. You may also be penalized if you over-contribute more than $2000.00 over your lifetime.
For more information about RRSPs, check out my RRSP Page.
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