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Smart Investor Tip of the Day
RRSPs are Canada’s clever way of helping people save money for retirement. Saving for many years is quite a herculian feet for most people but making planned contributions and withdrawals from your RRSP is a great investment way to get the most for your retirement buck.
The primary advantage of an RRSP account compared to standard investment accounts is the tax benefit. Contributions made into an RRSP are tax-free and the money held within this type of account can compound without having to pay taxes on the gains.
In that regard RRSP isn’t an investment as it is a container (an account) for investments. So you dont buy an RRSP you actually buy an investment into the RRSP account which you contribute into.
By not taxing individuals contributing to their RRSPs, CRA (Canada Revenue Agency) is rewarding those who are contributing to their twilight retirement years. RRSPs are actually tax-deferred rather than tax-exempt. Meaning any profits made from investments within an RRSP account (capital gains, interest, dividends) are not taxed to you as income right away. In fact they are taxed on it when the funds are withdrawn. The benefit of this is that for most people income tends to be lower in retirement than in your younger years.
So in other words RRSP provides a tax credit — it reduces your taxable income by the amount you contribute (up to a yearly limit).
RRSP accounts can be opened at any financial institution and investment house such as Questrade.