RRSP – Registered Retirement Savings Plan

This is a plan to help you save money for retirement. It provides immediate tax advantages for contributions and allows your investments to grow inside the plan on a tax-deferred basis.

Contribution to a RRSP will reduce your taxable income ‘dollar-for-dollar’, thus reducing the income taxes that you would be required to pay on your current year’s income. For example, if you are at a 40% tax rate (don’t forget to include CPP), a $1000 contribution to your RRSP will reduce your taxes that year by $400!

Contributions are limited to an amount of up to 18% of your last year’s income less any pension adjustments (if you were a member of a company pension plan last year). For the year 2007, the maximum amount you can put away is $19,000 (ie. you have a net income of $105,555). In 2008 the amount will be $20,000 (ie. a net income of $111,111).

Remember in your retirement planning that having only RRSP monies at retirement could create an onerous tax burden on you during your retirement.

You must collapse your RRSP and withdraw the funds by December 31st of the year in which you turn age 69. The funds are totally taxable to you at that time, so it is important to transfer them into a plan that both spread out the taxation impact on your funds and provides you with a continuing income stream through out your retirement years.

You have two options:

RRIF (Registered Retirement Investment Fund) – a plan that offers flexibility in investment and withdrawal amounts. It is the best plan if you are concerned about the tax level you will be forced into if all your investments at retirement provide too much money too soon.

Annuity – a plan that allows no flexibility but that does guarantee a fixed monthly income for life. Plans can be indexed for inflation (but will have a lower initial monthly amount). It is best for people not wishing to risk their money investing in funds and just want to know what they will be paid for the rest of their life.

Many financial institutions such as banks, trust companies and insurance companies offer RRSP plans with different types of investments. Even if you already have a plan but are not satisfied with the institution, you may transfer your RRSP investments to another carrier. Special care must be taken though, as many investments have ‘surrender charges’ and no transfer should create a greater penalty than eventual reward.