Can someone explain me RRSP?

Registered plans are designed to treat the income tax differently and promote the habit of saving money to meet future needs of Canadian.

Registered Retirement Saving Plan (RRSP)

As the name suggests, the objective of the plan is to save to support retirement. The word ‘Plan’ may be misleading to assume that by simply parking your hard-earned money into RRSP may take care of the retirement. But that’s not the case here. Growth on the RRSP money depends upon where the money is really invested i.e.buying stocks or mutual funds or low risk instruments like Bank Deposits (GIC) or may be simply an interest saving account.

Reduce current tax: Every $ contributed into RRSP is deducted from taxable income in a given year. This is the upfront and most lucrative benefit to save in RRSP.

Tax in future: Saving tax in current year’s return does not mean that you got tax-free money. It’s simply ‘deferring’ or postponing the tax liability. Still it’s better because it’s highly likely that overall tax to be paid during retirement days will be less than what was supposed to be paid today, if the money was not saved under RRSP. You pay tax on the amount you withdraw from RRSP using an effective marginal tax rate.

Tax sheltered growth: Any earning on investment i.e. interest, dividend or capital-gain is taxable. But earnings are also tax-sheltered within RRSP accounts. So in a nutshell both principal and return on investment bear zero tax until withdrawn.

Interest on Interest: Since there is no tax paid all the money is available. And more money brings the ability to earn more i.e. compounded growth. Again the earnings, whether it’s interest, dividend or capital gain, depends upon where the money is invested.

How much to save: Maximum limit to contribute decided by the government but typically the calculation starts with 18% of previous year’s taxable income. Your employer may also offer Group RRSP or other famous Pension Plans but which may also impact your contribution room for individual RRSP. With leftovers from past and deductions etc. you can find the exact amount online under My CRA.

Save tax with spouse: Another smart way of reducing overall family tax payment during retirement is by parking your savings under RRSP which belongs to your spouse. This strategy works well if you know for sure that your spouse’s pension income will be lower as compared to yours.

It’s a smart way of treating your tax today and financing your own pension. No brainer!

Registered plans are designed to treat the income tax differently and promote the habit of saving money to meet future needs of Canadian.

Tax Free Saving Accounts (TFSA)

A well designed Registered saving plan to motivate Canadians for saving money. This account is typically targeted for short to medium term needs like going on vacations or buying a car. It’s like any other regular savings account where your after tax-paid money is parked and growth depends upon which financial instrument is selected e.g. stocks, mutual funds, bonds, GIC or interest account.

Tax-free growth: it’s a true tax-free account where there is absolutely no tax charged ever. The reason behind that the money invested is already tax-paid. And any earnings received from interest, dividend or capital gain stays within the registered plan.

No tax benefit on return: Don’t get confused with RRSP because there are no deductions available on taxable income on current year’s return.

Interest on Interest: Any type of return is tax-free which promotes the idea of re-investment. And more money brings the ability to earn more i.e. compounded growth. Again the earnings, whether it’s interest, dividend or capital gain, depends upon where the money is invested.

How much to save: Maximum limit to contribute decided by the government per year. Current limit is $6000 regardless of your taxable income. With leftovers from past and deductions/withdrawals etc. you can find the exact maximum contribution amount online under My CRA.

Enjoy your money:There is no restriction on withdrawal. You can use this money for any purpose anytime with no tax. No impact on government benefits you may be receiving like GST Credits, Employment Insurance income or Old Age Security (OAS) income.

Every Canadian should avail the tax benefits of this registered plan. Because money is tax free and free feels good!

Registered Education Savings Plan (RESP)

It’s a registered plan designed to support the high cost of post-secondary education in Canada. Government also contributes to motivate parents to save for their kids' education during young days.

Start after tax:Parents open RESP accounts for each kid separately with the hope that their kids would extend their studies after high-school. No tax benefit on parent's tax return.

Government dollars: There is a certain percentage of your contribution, invested in the same account by the government. No tax due until withdrawn.

Interest on Interest : No tax due on the growth as well as on government contribution. That means amount accumulates year over year. And more money brings the ability to earn more i.e. compounded growth. Again the earnings, whether it’s interest, dividend or capital gain, depends upon where the money is invested. Though most plans decide how and where to invest usually with a long term horizon.

How much to save: Limit maximum contribution limit is $50,000 but most RESP plans mandate periodic contributions. Also there is a ceiling on government funds.

Tax : Money is withdrawn from the RESP account by the student who is enrolled in a qualified program. No tax on contribution but all other earnings are taxable for your kid’s yearly tax return, which is usually very low.

Only for Education: This money, contribution or growth, can’t be used other than the eligible educational programs (usually full time college/university). In case your kid does not go for post secondary education, the government takes back the its’s portion of contribution and any growth is added to your taxable return when the account is closed.

Government contribution is free-money and with long term growth plans this registered plan can become a substantial support for your kid’s education.