While the decision to use a Registered Retirement Savings Plan (RRSP) has been made more complicated over the last ten years by the popularity of the Tax-Free Savings Plan (TFSA), it is still an important savings tool.
The TFSA allows an individual to contribute after-tax dollars into an investment and withdraw funds with no tax implications. You forego income tax savings now in order to not pay taxes later.
There are still many situations where an RRSP is a more appropriate product over a TFSA.
Contributions to an RRSP are tax deductible and will reduce the amount of income tax paid. When an individual is in a high income tax bracket, they will experience greater savings when contributions are made to an RRSP compared to a lower tax bracket. Once you retire, these funds can be converted to regular income payments. Normally, this will be in a lower tax bracket than when the funds were contributed, which will mean less tax paid than what was originally saved.
A spousal RRSP contribution will allow for income tax savings and also more efficient withdrawal of the funds once retirement income commences.
Funds contributed to an RRSP can also be used as a down payment for the purchase of a first home (up to $25,000) or to pay for your or your spouse’s education costs (up to $20,000). These amounts will then have to be paid back to the RRSP over time.
If you’re looking to sock away money for your retirement, and want to save the tax from your more likely higher income than down the road, RRSPs are the way to go.