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Ontario|Tax LawRules for Individuals 178 RRSPs The Government of Canada has established special tax rules for retirement investments to encourage people to save for their retirement. Investments made under these special rules are called Registered Retirement Savings Plans, or RRSPs.
RRSPs are tax deferral plans that allow you to put a percentage of your earned income into an investment account. You will not have to pay tax on the income you contribute to your RRSP until you withdraw the money. The money that you put into an RRSP can be invested in mutual funds, GICs, term deposits, stocks, bonds, or mortgages. You should make sure that the investment you would like to buy is RRSP eligible. RRSPs are registered with Canada Revenue Agency.
- Benefits of RRSPs
There are many benefits to investing in an RRSP.
First, RRSPs usually reduce the amount of income tax you have to pay. Your RRSP contribution for a particular year is included on your income tax return as a deduction. This reduces the amount of tax you have to pay in the year that you make the contribution, because it reduces your annual taxable income for that year. Essentially, you do not pay tax on the money you invested until you withdraw it. If you withdraw the money during your retirement or at a time when you have very little income, you will be in a lower tax bracket and you will pay less income tax than if you had paid tax on the money when you earned it.
The second advantage is that RRSP investments are tax-sheltered. This means that any increase in the value of your investment will not be taxed while the money is in the RRSP. Because your RRSP is tax-sheltered, it grows faster than it would if you had to pay tax on it. Any gain in your investment will be added to the principal amount you contributed. The entire investment is tax sheltered, and you will not have to pay tax on it until you start withdrawing money.
Third, RRSPs are a good way to save for your retirement or for some other time when you need to supplement your income. For example, if you decide to take time off to raise your children, or if you quit your job to start your own business, you can use your RRSP as a source of income. You should make sure that your RRSP allows you to withdraw money when you want to. Some RRSP plans lock in your investment for a certain period of time.
Finally, RRSPs allow you to split your retirement income with your spouse by allowing the person with the larger income to make contributions to their spouse's RRSP. The result is that each spouses' RRSP will be about the same amount, which means that both spouses can withdraw money. The couple will therefore be taxed on two smaller incomes rather than one single larger income. The overall result is that the couple will pay less tax.
For additional information on RRSPs you can refer to other sections of Legal Line . You can also obtain more information about RRSPs and the tax advantages they offer by contacting Canada Revenue Agency, a financial advisor, a tax lawyer, or an accountant.
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