RRSP (Canada)

The Great White North's version of the 401k

The RRSP is short for Registered Retirement Savings Plan. It's a retirement vehicle created by the Canadian federal government in 1957 to encourage Canadians to invest in their retirement.

The benefits of contributing to such a plan include:

  • Tax deductible contributions reducing your taxes payable
  • Tax-deferred growth of investments while in the plan
  • The creation of a retirement income source
  • The ability to borrow funds from the plan to buy your first home or fund your education
  • The deferral of deductions to future years when earned income is higher

The maximum contribution in 2006 was $18,000 or 18 percent of your earned income less any pension adjustments you may have. When you turn 69, you must move your RRSP into a RRIF (registered retirement income fund) by the end of the calendar year. Each year thereafter, you must withdraw a minimum amount from your plan with the funds taxed as regular income.

In 2005, 6.1 million Canadians contributed $30.6 billion towards RRSPs. That's just 7 percent of the eligible contributions of $437 billion. Further, of the 86 percent of Canadians eligible to make contributions, only 31 percent actually did. The median contribution on an individual basis was $2,630.

Why is this number so low?

Reasons for this huge shortfall in contributions include:

  • Canadians have a poor savings rate.
  • There is very little education about RRSPs and other finance subjects.
  • The standard of living is lower compared to the United States.
  • Conservative lending practices for RRSP loans are discouraging.

Canadians have an excellent retirement vehicle available to them. Unfortunately, many aren't taking advantage of the tax deferral opportunity this generous system provides.

Here are a few tips to keep in mind that will help you reach your retirement goals using the RRSP:

  • Start today - the earlier the better. Thirty years of compounding compared to 20 is a huge difference.
  • No contribution amount is too small. It's better to do something than nothing at all.
  • Many financial planners refer to the axiom pay yourself first. Take a fixed amount from your paycheck every month and contribute to your RRSP before doing anything else.
  • As said earlier, maximize your contribution amount.
  • Get an RRSP loan to make your contribution.
  • Have an end goal in mind. How much will you need to retire?
  • Seek professional help if you're not comfortable doing it yourself.
  • Open a spousal RRSP to split income more effectively.
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