The term RRSP stands for Registered Retirement Savings Plan and it is essentially a special kind of savings account. First introduced in 1957, an RRSP is one of the best ways available for Canadian investors to save money for retirement while helping them lower their income tax payments.
How Does an RRSP Work? It’s Actually Quite Simple
The first step is to open an RRSP account with a financial institution, which can usually be done at any bank or brokerage firm. Once the account is open the holder can start putting money in to it right away. The cash inside the plan can be used to buy a wide variety of financial instruments such as GIC’s, mutual funds, stock or bonds. Any interest, dividend or capital gain made inside the account will not be taxed until that money or investment is withdrawn. The purpose being that the investments in the account can grow much faster when they are not being taxed each year. The tax is still eventually owed, but it is deferred until the money is taken out which would normally be at retirement when that person’s yearly income would typically be much lower.
In addition to saving for retirement, putting money in to an RRSP has another great advantage - lowering income tax. Any deposits made to the account (known as contributions) can be deducted from that individual’s taxable income that year. The more money that goes in to the plan, the less income tax will be due at the end of the year.