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Before making a major financial decision you
should consult a qualified professional.
An RRSP, or Registered Retirement Savings Plan, is a
registered 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 a
Registered Account is Not Taxable
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money is withdrawn.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 registered account.
RRSP Withdrawals = Taxable
Income
Funds can be withdrawn from an RRSP at any time, but all withdrawal amounts
must be included in taxable income on Line 12900 of the tax return (RRSP
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 At the time funds are withdrawn, tax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.
Mandatory Conversion to
RRIF
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time the funds must be withdrawn, or converted into a Registered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), another registered account. Income earned in a RRIF is also not
taxable while it remains in the RRIF, including interest, dividends and
capital gains. In the year after an RRSP is converted to a RRIF, minimum
withdrawals must be made. More than the minimum withdrawal can be taken
out, but if the RRIF is locked-in there will be a maximum withdrawal.
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will be in a lower tax bracket, and the funds can be withdrawn at a lower tax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.
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