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What are the benefits of RRSPs?
While designed specifically as a retirement vehicle, an RRSP has benefits throughout your lifetime.
- By contributing to an RRSP throughout your working career, you'll realize immediate tax benefits at a time when your income is generally highest. The total amount of your annual contribution can be deducted from your gross income at tax time, reducing the amount you pay in income tax that year.
- The income earned in your RRSP is not taxed until it is withdrawn. While your investments sit in your RRSP, their growth is tax sheltered and so the total value may grow more quickly.
- By the time you begin to withdraw the funds at retirement, you will probably be in a lower tax bracket than during your earning years. Funds withdrawn at that time will benefit from this lower tax rate.
- Special features of RRSPs allow you to do further tax planning or use your RRSP to fund specific life events.
RRSPs in Action
Let's explore the immediate benefit of making an RRSP contribution for an individual with $30,000 in taxable income and a 26% combined federal and provincial tax rate.
| |
$0 RRSP Contribution |
$3,000 RRSP Contribution |
| Taxable Income |
$30,000 |
$30,000 |
| Combined Federal and Provincial Tax Bill |
$7,800 |
$7,020 |
| Deferred Tax |
$0 |
$780 |
Next:
Rules & Regulations
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