Rrsp Investment Strategies: Where To Begin?

A Registered Retirement Savings Plan (RRSP) is a savings plan registered with the Canadian federal government that you can contribute to for retirement purposes. RRSPs are tax-advantaged, meaning that contributions are not taxed in the year they are made. Any investment income earned from investments held within the RRSP can then grow tax-deferred until it is withdrawn. RRSPs can include a wide range of investments, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). There are several types of RRSPs, including individual, spousal, and group plans, and the best option for you will depend on your financial goals and investment preferences.

Tax-deductible contributions

RRSP contributions are tax-deductible (up to your personal deduction limit), and your investment earnings grow on a tax-deferred basis. You can contribute to your RRSP up until December 31 of the year you turn 71.

With an RRSP, your contributions may be tax-deductible, meaning that you can claim a tax deduction for the amount you contribute and potentially reduce taxable income when filing your taxes. This means potentially paying less tax and saving more money.

Your RRSP deduction limit, also known as your "RRSP contribution limit", is the maximum amount you can contribute to your personal or spousal RRSP in a given year. It is based on your earned income from the previous year and any unused contribution room from previous years.

Generally, if you go over your RRSP contribution limit by $2,000 or less, you may not be penalised. However, you can't deduct these excess contributions from your taxable income. Excess contributions over $2,000 are penalised, and you may pay a 1% tax per month unless you withdraw the excess amounts before the end of the month when the excess contribution was made or contributed to a qualifying group plan.

Tax-deferred growth

When you invest in an RRSP, you are investing with pre-tax dollars. This means that you get to keep the full amount of your investment earnings, such as dividends, interest, or capital gains, without having to pay taxes on them until you withdraw the money. This is in contrast to investing outside of an RRSP, where you would have to pay taxes on your investment earnings each year.

The tax-deferred growth of an RRSP can be especially advantageous if your tax rate is lower when you withdraw the money in retirement than it was when you made the contributions. This is often the case, as you may be in a lower income bracket during retirement. By deferring the taxes until retirement, you can potentially pay less tax on your investment earnings.

Additionally, the tax-deferred growth of an RRSP can be compounded if you reinvest your investment earnings within the RRSP. This allows you to earn returns on top of your returns, further accelerating your savings growth over time.

It is important to note that early withdrawals from an RRSP can disrupt the tax-deferred growth and may result in tax penalties. Therefore, it is generally recommended to leave the funds in the RRSP until retirement to maximize the benefits of tax-deferred growth.

Tax-free savings accounts

Unlike RRSPs, contributions to a TFSA are not tax-deductible. However, TFSAs offer tax-free withdrawals at any time. There are some circumstances that would make a TFSA a smarter choice. If you think you might need the money before your retirement, a TFSA will allow you to withdraw as much as you want, whenever you want. The flip side of that equation, however, is that easier access to your money might derail your retirement planning in the long run.

Remember that the tax advantage of an RRSP relies on the assumption that you will be in a lower tax bracket when withdrawing the money in retirement than when you are contributing to it. So, if you earn less than $50,000, it makes more sense from a tax perspective to invest the money in a TFSA. If you earn more than $50,000 and are investing solely in your retirement (and perhaps saving for a home or planning more education), an RRSP makes more sense. Or, if you have enough money to spread around, consider investing in both!

Investment options

• Guaranteed Investment Certificates (GICs)
• Mutual Funds
• Government and Corporate Savings Bonds
• Stocks
• Exchange-Traded Funds (ETFs)

GICs are a very low-risk investment that you can set up within an RRSP at any bank or financial institution. They offer a guaranteed rate of investment over a fixed period. Mutual funds are another popular choice, made from a variety of investments that are bundled together, making it easier to diversify. Government and corporate savings bonds are investments that work like an IOU, where investors loan money to a company or government and usually earn a fixed rate of return. Stocks, in particular, tend to be more volatile investments and are suitable for those with a higher tolerance for risk. ETFs are collections of stocks and bonds designed to track the stock market over time, so they are suitable for those who can tolerate some risk and are not considering withdrawing money from their RRSPs in the short term.

Spousal RRSPs

A spousal RRSP is a type of Registered Retirement Savings Plan (RRSP) that is available to married couples and common-law partners. It allows couples to split their income and grow their retirement savings while lowering the amount of tax they pay as a couple.

The spousal RRSP is typically set up in the name of the spouse who has a lower income. The higher-earning spouse can contribute to their partner's spousal RRSP, up to their personal contribution limit. This allows the higher-earning spouse to receive a tax deduction, which could lower their tax bill for the year. The lower-earning spouse will then be taxed at a lower marginal tax rate when the money is withdrawn from the spousal RRSP, potentially paying less tax on the spousal RRSP assets at retirement.

The spousal RRSP is a way to balance income as a couple and works best when there is a large disparity between the incomes of each spouse or partner. It is important to note that contributions to a spousal RRSP reduce your RRSP deduction limit. You can contribute to a spousal RRSP until the end of the year that your spouse or partner turns 71.

There is a three-year attribution rule that applies to spousal RRSPs. If a withdrawal is made within three years of a contribution, the contributor will be taxed on that amount. The spousal RRSP can be withdrawn from at any time, but the three-year attribution rule means the contributor may be taxed on those withdrawals.

Frequently asked questions