In 1957 Prime Minister Louis St. Laurent introduced the Registered Retirement Savings Plan (RRSP). Prior to that time, Canadians could only build retirement nest eggs through company retirement plans. The RRSP allows Canadians, who may be self-employed or who do not have company pension plans, to invest in their own retirement. An RRSP contribution may be made up to, and including, the last day of February of the tax year for the participant to claim a tax deduction.
Advantage #1: Tax Deferrals
As of September 2010, Canadians may contribute up to 18 percent of their gross salaries, or up to $21,000 to an RRSP. Money directed to RRSP accounts are not taxable until they are converted to Retirement Income Funds (RIF), usually at age 71. This tax deferral allows Canadians to reduce their taxable income in the year that they make contributions.
Advantage #2: Home Buyers' Plan
The Home Buyers' Plan (HBP) is a federal initiative offered to first-time home buyers and to anyone building a home for a family member with a disability. This initiative allows Canadians to finance their new homes by withdrawing up to $25,000 of their own money from their RRSPs, without a tax penalty. Canadians have up to 15 years to repay the withdrawal of their RRSP money.
Advantage #3: Lifelong Learning Plan
The Lifelong Learning Plan (LLP) allows any full-time student enrolled in a qualified educational program to withdraw funds from the student's RRSP to pay for her education. The maximum amount that can be withdrawn from an RRSP account under the LLP is $20,000 or $10,000 per year. Once the student has repaid the amount into the RRSP account, she may participate in the LLP again.
Advantage #4: Forced Savings
Because many employers offer a variety of RRSPs through their own insurance companies or financial institutions, funds are deposited directly into the employees' RRSP accounts, before the money has been taxed. For employees, this form of direct contribution to RRSPs is a means of forced savings. Having an employer (or the employer's financial institution) tend to the administrative details of an RRSP helps employees save their own money by eliminating the temptation of spending it elsewhere.
Advantage #5: RRSPs for Partners
For couples (spouses or common-law partners who have been living together for more than one year), the person who makes more money may contribute to the other's RRSP account. This alleviates the tax burden for the higher earner and is especially beneficial to couples in which only one of the partners works outside of the home.
Disadvantages of an RRSP
A person holding an RRSP account must begin withdrawing some of the money when she reaches her 71st birthday. This money is then taxed at a rate consistent with the amount withdrawn. For senior citizens who have invested large amounts of money into their RRSPs when they were working, they may risk lowering the amount of benefits they would receive from federal initiatives, such as Old Age Security and the Canada Pension Plan.
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