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Registered Retirement Savings Plans (RRSPs)
Whether you are just starting out or well advanced in your retirement planning, it's in your best interest to take advantage of Canada's best tax deferral: the Registered Retirement Savings Plan (RRSP). An RRSP is an individual savings plan that allows you to make tax-deductible contributions over a number of years (up to 71 years of age, within limits).
What are the major benefits of an RRSP?
- Investments held within your RRSP grow tax-free.
- Interest, dividends and net capital gains are not taxed until the money is withdrawn from your RRSP at retirement.
- You receive a tax deduction for contributions (subject to certain limits).
A case in point: If an investor in the 50% tax bracket put $10,000 into an RRSP and left the money for 25 years at an annual compound rate of 10%, they would end up with $108,347 (tax-free). The same amount left outside an RRSP would equal only $33,863.
There are limits on how much of a contribution is tax-deductible. In fact, there's a penalty for those who over-contribute (1% of the over-contribution per month). Each year, investors are eligible to contribute up to 18% of their earned income from the previous year to an RRSP. Foreign-content restrictions previously in place for RRSP saving have been lifted. So you may choose to invest your RRSP domestically and internationally as you see fit.
The current annual maximum contribution amount established by Canada Revenue Agency (CRA) for 2007 is $19,000 (less any pension adjustments). Determining the exact dollar amount you may contribute to your RRSP is easy. You can find the amount on your previous year's Notice of Assessment or by contacting CRA.