What is it?
A savings plan that’s registered with the federal government to qualify for the following tax advantages:
Earnings on the investments in an RRSP aren’t taxed when earned. Instead, they’re “tax-deferred,” meaning investors don’t have to pay tax until savings are withdrawn from the plan. Investors earn income on money they’d otherwise have paid out in tax. Over time, this can add up to significant savings.
RRSP contributions are tax-deductible (within the specified limits). Contribution amounts are deducted from a person’s taxable income for
the year, reducing income tax owed.
A group RRSP differs from an individual RRSP in two ways:
- Contributions to group RRSPs can be made through payroll deduction.
- Group RRSPs usually have lower investment management fees.
How does it work?
Limits are defined by the Income Tax Act. The limit is 18 per cent of the previous year’s earned income minus the pension adjustment for the
previous year. The 18 per cent limit is subject to a dollar maximum.
If contributions to an RRSP are less than the limit, the difference is called contribution room. For example, an investor with an annual RRSP contribution limit of $7,000 contributes only $2,000. The contribution room is $5,000 and can be carried forward for an unlimited time. For more information about RRSP contribution limits, visit the Canada Revenue Agency website.