Textbook definition:
A Registered Retirement Savings Plan, more commonly known as an RRSP, is an investment account where money can grow on a tax-deferred basis.
What that means:
The RRSP is one of the most widely used investment accounts in the country. Unlike with a non-registered account, where you pay tax on capital gains, dividends and income, money inside of an RRSP can grow year after year without generating a tax bill. It can be a good account for retirement savings because of compounding: If you don’t have to pay tax then all that money has the potential to grow unabated for decades. At the same time, whatever you put in the account can reduce your taxable income dollar-for-dollar. If you get a tax rebate, you can add that windfall to your RRSP contribution for more savings. There are some rules. With a limited number of exceptions, you can only invest 18% of your annual income, up to a maximum of $27,830 in the 2021 tax year. Any unused contribution room will accumulate annually, but if you pull money out you won’t get that room back. Also, this is a tax-deferred account, which means that any money that’s removed from the account will get taxed at your marginal rate. There are some exceptions, such as the Home Buyers’ Plan, which allows first-time home buyers to remove $35,000 from their account tax-free, but which need to be paid back within 15 years, and the Lifelong Learning Plan which allows a withdrawal of up to $10,000 in a calendar year to fund full-time training or education of you or your spouse. These funds must be paid back within 10 years. The RRSP works best when you invest throughout your income earning years — giving you a hefty rebate — and pull money out in retirement, when you’re in a lower tax bracket.
10-second take:
The RRSP is generally considered a good account to use for retirement savings. Its tax-deferred status can help you increase returns faster than if you had to pay tax on your gains and earnings.