An RRSP, or Registered Retirement Savings Plan, is a savings or investment
account which allows you to defer paying tax on funds deposited to it.
When you make a contribution to your RRSP, you get a tax deduction for the
amount contributed. The deduction reduces taxable
income, so the higher
your marginal tax
rate, the greater the tax savings will be.
Income earned in an RRSP is not taxable while it remains in
the RRSP, including
interest, dividends, and capital gains, so can grow tax free until the
money is withdrawn. There may be tax withheld from dividends received
from some foreign investments, but not from dividends received from US
corporations. See our article on which
investments should be held inside vs outside an RRSP.
Funds can be withdrawn from an RRSP at any time, but all withdrawal amounts
must be included in taxable income. At the time funds are withdrawn, tax
will be withheld based on the total withdrawal amount. See our article
which details the amount of withholding tax on
RRSP withdrawals.
Funds can remain in an RRSP until the year the taxpayer turns 71, at which
time the funds must be withdrawn, or converted into a Registered
Retirement Income Fund (RRIF). This maximum age was increased from
69 to 71 by
the 2007 Federal budget,
giving people an additional two years to contribute.
Theoretically, when you start withdrawing funds from an RRSP or RRIF, you
will be in a lower tax bracket, and the funds can be withdrawn at a lower tax
rate than when they were contributed.
See also
