My experience with a scarcity mindset

An RRSP is an Investment Account

 

An RRSP is a type of investment account meant to help Canadians save for their retirement. Some people have a company or government pension plan but many don't. The RRSP was created by the federal government to equalize the playing field when it comes to retirement savings options.

There are two great features of an RRSP: you get to lower your taxable income when you put money in it, and, unlike a non-registered account, all of the investment income (interest, capital gains, dividends) earned in the account is not taxed until you take the money out later in life, ideally in retirement.

RRSPs are meant to be used for saving for retirement. That doesn’t  mean you can't take the money out sooner. You can, but you will have to pay income tax on the amount you withdraw as if it were regular earned income. There are two exceptions to this: when you withdraw funds under the Lifelong Learning Plan (to go back to school) or under the Home Buyer's Plan (to buy a home). RRSPs are most beneficial if you put the money in and leave it until you are retired or at least semi-retired.

What's to like

  • Lower your taxable income now by the amount you put into the account.

  • Put off paying taxes on investment earnings until you take the money out later in life.

  • Forced discipline since money isn't easy to access.

What's not to like

  • Little/no benefit if you need to take the money out while you're still in your peak earning years.

  • Somewhat inflexible when managing your income in retirement.

  • Investment income is taxed like regular income.*

How can I use RRSPs?

An RRSP is meant for your retirement savings. If you don't have a pension plan at work, you should probably have an RRSP.

You can reduce your tax bill now, and maybe get a tax refund. The tax benefits are particularly helpful for people in a high tax brackets since they get the biggest tax reduction, but anyone who is in a higher tax bracket now than they expect to be when they retire can benefit. 

You can hold many different types of investments in an RRSP account, like bonds, GICs, stocks, mutual funds and ETFs. You can open an RRSP at a bank, credit union or online broker (among other institutions). 

Anything else I need to know?

There is a maximum amount you can contribute every year. Generally, it is 18% of your earnings, but there is a cap. Also, if you have a pension plan, your RRSP contribution room will be adjusted lower. If you put in more than you are allowed, you will pay a penalty. You can find out your contribution room by logging into your account with the CRA.

 

An RRSP is quite straight-forward, however there are some nuances to consider once you retire. At age 70, your RRSP converts to a RRIF, and you will have to start taking money out every year. The government sets a minimum percentage you must take out, and although for most people this is fine, it can require some planning to make sure you don't end up with too much taxable income in any given year. 

There are other nuances to using RRSPs, such as how investment income is taxed (there is no differentiation between interest, dividends and capital gains) and using a spousal RRSP to split retirement income and lower taxes. 

*Investment income held in a non-registered/taxable account is not all taxed like regular income. If you have a capital gain on an investment (the value goes up and you sell it), you only pay tax on half of the gain. If you receive dividends from a stock or fund, you get the benefit of the dividend tax credit, which results in a tax payment that is less than regular income. However, within an RRSP, there is no differentiation between interest, capital gains and dividend income.