The RRSP is a powerful savings vehicle

With “RRSP season” in full swing I thought I would remind you why the RRSP is a powerful savings vehicle, why you might want to take advantage of it, and share what our longer term game plan for this account is.

RRSP Facts

The maximum RRSP contribution limit for 2014 is $24,270 (comparing to the last year, 2013, $450 of RRSP limit has been increased for the year 2014). However, if you did not use all of your RRSP contribution limit for the years 1991-2013, you can carry forward the unused amount to 2014.  So, your RRSP contribution limit for 2014 may be more than $24,270.

The RRSP contribution deadline for the 2014 tax year is…drumroll please….March 02, 2015.

RRSP Power

  • A Registered Retirement Savings Plan (RRSP) is a savings and investment account that has special tax advantages.
  • Inside an RRSP you can hold a variety of investments including Guaranteed Investment Certificates (GICs), mutual funds, Exchange Traded Funds (ETFs), bonds and other securities.
  • An RRSP is an account, not a mutual fund or an investment itself.
  • Contributions to an RRSP are tax deductible, so you can use these tax deductions to reduce your taxable income.
  • There are contribution limits for an RRSP account.
  • Contribution limits are based on the contributor’s earned income and can be found on his/her tax notice of assessment.
  • There are penalties if you over-contribute to your RRSP although a small exemption exists.
  • Unused RRSP contribution room can be carried forward, for future tax deductions in future tax years.
  • After you select investments for the account, the income you earn on those investments inside the RRSP are tax exempt, as long as money stays in the account.
  • A common type of RRSP is an individual RRSP, registered in the name of the person contributing to it.  There are also spousal RRSPs and group RRSPs.
  • RRSPs can be managed by a professional money manager but you can do-it-yourself (self-directed).

Why the RRSP makes sense

As referenced above, there are two great tax benefits that RRSPs provide Canadian investors:

  1. a tax deduction from your contribution, and
  2. tax-deferred growth.

With your tax deduction, you can reduce the taxes you pay today.

With tax-deferred growth, investments in your RRSP can compound over time without being taxed as long as money made stays in the account.

For most Canadians, to reap the benefits of this tax-deferred account they should maximize their contributions where it makes sense (based on their earned income) and keep the fees associated with their investments inside the account as low as possible for as long as possible.  RRSPs are highly effective for Canadians who will be in a lower tax bracket in retirement versus their contribution years. This is because you’re not as rich as you think:  when you take money out of the account, you have to pay the tax on the money withdrawn.

Our RRSP Game Plan

Every month we make preauthorized contributions to our RRSP accounts and every quarter, as money builds up, we make more investment purchases.  So for us there really is no “RRSP season”.  Right now we hold a mix of Canadian and U.S. ETFs inside our accounts along with a few U.S. dividend paying stocks. We reinvest all distributions and dividends paid every quarter from these investments so in effect, tax-deferred money is making more tax-deferred money.

Our goal is to eventually use withdrawals from these accounts each year (up to $5,000?, not sure yet) to help to pay for our retirement expenses but those withdrawals are at least 10 years away. We simply need to keep contributing to our accounts and focus on that.

Along with debt payments building assets inside an RRSP is an important component to secure the financial future of most Canadians. With the RRSP contribution deadline for 2014 tax year closing in soon consider taking some time to learn more about this account and how it can help you.  The account and the assets you put inside it can be a very powerful savings vehicle, one that your future self will thank you for.

Do you use the RRSP contribution room available to you?

My name is Mark Seed and I'm the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and I'm now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Subscribe and join the newsletter! Follow me on Twitter @myownadvisor.

19 Responses to "The RRSP is a powerful savings vehicle"

  1. No RRSP for me since I retire early and I don’t want at all the gov in my financial business and their silly rules that they change when they see fit (= more votes).
    Sorry to say that I’m an anti-RRSP

    Reply
    1. Nothing wrong with your stance. Personal finance is personal for many reasons. I know for us, we need the RRSP to retire early since we’re making more money in our contribution years vs. our retirement; so it’s a tax advantage for us to contribute now. Thanks for your comment farcodev.

      Reply
  2. Hi Mark;

    I always boost my RRSP contribution before the deadline end of Feb.
    The reason is quite simpily to make sure that I have utilized my maximum amount from the previous year and to get a good start to this year. As to the TFSA well you have a lifetime to max out your amount so to say

    RICARDO

    Reply
  3. As you know I won’t be using all the contribution room for the RRSP but this is because I need to start working on the TFSA. I also plan on using my RRSP to pay for my expenses when I retire, which is why I love it when companies like Fortis increase their dividends every year 🙂

    Reply
  4. Hi mark,

    I’m SHOCKED that you didn’t address that if you are making large RRSP contributions between Jan – March then you are likely doing it wrong.

    The T1213 is a great way to not give the governement a tax free loan!

    Reply
    1. None, I have to save some content for other posts! Kidding aside, folks should consider using T1213 to reduce tax deductions at the source; taking back the interest free loan to the government; a great way to get taxed less throughout the year.

      Thanks for your comment.

      Reply
  5. Be aware that like any government developed program, the rules are subject to change. When I started investing (1979) the contribution limits were much lower. One year my max was as low as $562 due to being in a pension plan. I still invested, but it was tough to grow the balance very quickly.

    Another issue is changes to the taxation rate. There has been at least one drop in the tax rates over my career.

    Personally, it actually made little sense to invest using RRSPs because I was in a DB plan with an inflation factor. I did anyways as I contemplated I might want to do something else and it would be better to have options with funds in an RRSP than have a new car every 2-3 years. Once I got married, I also ensured my wife maxed hers out as well, even though she was also in an indexed DB plan.

    I love the RRSP program. It’s the second best investment program the government has behind the TFSA. But also keep in mind that the TFSA might also be changed by future governments. IMO, keep your powder dry and all your options open.

    Reply
    1. Great comments Lloyd. We also have pension plans at work but I still feel contributing to the RRSP is the way to go for us. I hope to have a tax problem in retirement and if we decide to retire early, or can retire early, then we’ll need every penny in our RRSPs to do so.

      I also think the RRSP is the second-best retirement account for all Canadians behind the TFSA. We’ll see what the future holds for us eh Lloyd and what governments might change?!

      Reply

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