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Debunking The RRSP Mystery

As you probably already know, Canadian taxpayers are eligible to contribute to their retirement savings through something called an RRSP.  Some of you might actually contribute too… for those who do: Good Job!; for those who don’t: START NOW!

If you’re a little confused by all the banking acronyms out there (RRSP, RSP, LIRA, LRSP, etc., etc…) I don’t blame you.


  • RSP = Retirement Savings Plan
  • RRSP = Registered Retirement Savings Plan

In general: RSP = RRSP – when people say one, they mean exactly the same thing.  The “Registered” part has to do with the fact it is registered with the Federal Government, allowing you to take advantage of the benefits of holding an RRSP.

As for the other acronyms… we’ll worry about them later.

Now, the biggest part of the shroud of secrecy that surrounds RRSPs has everything to do with the last letter of the infamous acronym.

P = Plan

An RRSP isn’t an investment on it’s own, like a stock, mutual fund, a bond, or a Guaranteed Investment Certificate (GIC):  It’s a PLAN.  It’s a portfolio to hold investments inside.  If it helps, think of it as a manilla folder that you hold your investment statements inside.  Of course banks and investment brokers confound and confuse you by asking you “Have you bought RRSPs this year?”

You can have virtually any kind of investment in an RRSP:

  • stocks
  • bonds
  • GICs
  • mutual funds
  • cash (Yes, even plain old cash… sitting there earning little to no interest)

When you go to a bank or broker and “buy an RRSP”, you are getting some combination of the above.

The other part about the Plan is that you can hold multiple RRSPs.  For example, you could have:

  • A Mutual fund account from your Big-5 bank (RBC, TD, Scotia, BMO, CIBC)
  • Stocks through a discount brokerage
  • A high-interest savings account from an online bank (ING, PC, etc.)
  • Canada Savings Bond RRSP

There are no restrictions on the number of accounts you can hold, and only a few restrictions on the types on investments.  See the Canada Revenue Agency’s RRSP website if you’re more curious.…

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Friday’s RR Top 5

Continuing my weekly tradition, here’s my five (in no particular order) favourite personal finance articles in the news and/or blogosphere:

  • Canadian Capitalist answers Questions on Cancelling Mortgage Life Insurance (and others)
  • Kathryn, writing a guest post on MDJ asks: To RESP or Not: Should we be funding our children’s higher education? (You can read my opinion in the comments)
  • Thicken My Wallet gives their take on Personal finance blogs vs. mainstream media
  • Frugal Trader of Million Dollar Journey writes about his first step to Buying a Car – The Research
  • Tax Guy discusses more of the implications if you decide to Cash Out Your RRSP And Pay Down Debt (or if you want to buy a boat like in my Marginal Tax Rate post)
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The Benefits Of An RRSP

Continuing from yesterday… (you might want to go back and read it, if you haven’t)

The main benefit of saving to an RRSP is that any amount* you contribute is tax-deductible.  But what does that mean?

(*Note: there is actually a limit to the amount you can deposit in RRSPs in a year.  It’s 18% of your gross annual income up to a certain amount.  In 2009, the amount is $21,000. So if you make over $116,667/year… awesome :) , but you contributions are capped.)

For example, let’s say you earn $50,000, and are in a 20% (fictional, but for illustrative purposes) tax bracket.  This means, come April when you sit down to do your taxes, you’ll find that you owe the government:

Tax Owing: $50,000 x 20% = $10,000

Now, either you’ll have had the correct amount deducted by your employer, or you might have even paid too much tax, and you’ll get some money back in a refund!  But the worst case is, you may not have paid enough tax, and you’ll owe the government.

Continuing the example above, say that you maximize your RRSP contribution (by saving the whole 18%, as mentioned previously)

RRSP Contribution: $50,000 x 18% = $9,000

When you now calculate your income tax owing, you get to deduct (subtract) your contribution!

New Tax Owing:  ($50,000 – $9,000) x 20% = $41,000 x 20% = $8,200

Tax Savings: $10,000 – $8,200 = $1,800!

There’s even more tax savings to be had when your RRSP contribution drops you from a higher tax bracket to a lower one.

Now, you will have to pay income tax on the money you contributed eventually.  An RRSP allows you to defer your tax, that is, the government assumes that when you retire your income will be lower than while you were working and any income, in this case, paid from your RRSP will be taxed at a lower rate.  But the real advantage is that the growth of your investment through compounding interest, dividends, or capital gains are tax free as long as they are held in your RRSP!

If you do withdraw funds from your RRSP prior to retirement, you will pay a hefty amount of tax since it’s counted as income, and will be taxed at your highest marginal tax rate.  However, there are some exceptions! (Of course.)…