What is RRSP?
RRSP or Registered Retirement Savings Plan is an investment vehicle that provides you many benefits. It is a go to investment option that can be used for a number of objectives like saving tax, funding your education or that of your partner's, funding your first house, etc.
The ability to convert RRSP and use it for other purposes makes it a versatile plan that provides growth without compromising on the liquidity for important events.
Why You Should Invest in RRSP?
1. Helps you to Save Tax
When you save under Registered Retirement Savings Plan, you can reduce an equivalent amount from your taxable income. So, you end up saving on your tax burden. This is why, tax planes and financial advisors recommend you to save in RRSP.
Although RRSP provides you a relief from tax in terms of reduction in the taxable income, there is still a need to pay tax for the withdrawals from the account. The time value of the money that you pay as tax in the future is much less when compared to the time value of paying it today. Hence, it brings down the effective rate of taxation. This is achieved due to the compounding nature of the investment.
2. Provides Tax Refund
When you start your savings in the RRSP, you get a tax return for the amount of money that you have deposited under the plan. This immediate benefit, in terms of tax returns, helps you to start saving this money in other plans like Tax Free Savings Account i.e. TFSA. So, you get double the benefits for your savings in RRSP. That is why, RRSP is one of the best investment vehicles in Canada.
Change RRSP as RRIF in the future
RRSP can be easily converted into a Registered Retirement Income Fund. An RRIF or Registered Retirement Income Fund is an income vehicle that provides you with a steady source of income at regular intervals. This account pays you from your savings. The most important advantage of converting RRSP into RRIF is the ability to allocate as much as 50% of the RRIF to that of your souses income. As a result, when the spouse with a higher earning can allocate a percentage of the income into the account of the lower earning spouse and save on the taxes to be paid.
That is the icing on the cake!
Withdraw Tax free money for Buying Your First Home
Did you know that when you are buying your first house in Canada, you get an ability to withdraw as much as $35,000 as a tax free withdrawal? Yes, when you invest in RRSP, you need not worry about the taxes during withdrawal as there is always an option to withdraw as much as $35,000 for buying your first home. When you buy your house along with your spouse, you can withdraw up to $70,000/- without any tax burden for paying your down payment.
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Finance Your education with Tax-free Withdrawal
Lifelong learning is made simple by the Lifelong Learning Plan of RRSP. You can finance your education with a tax-free withdrawal from your RRSP. It can also be used to provide for the education of your spouse or a partner.
Do you have any questions about RRSP? Contact me to know more in detail.