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The Basics And Benefits Of Registered Retirement Savings Plans

What if there was a way that you could get the Canadian government to pay almost half of the money you needed to make an investment (be it for the purchase of stocks, mutual funds, guaranteed investment certificates, mortgages etc.). Then, when you’ve made money on that investment, through interest earned or capital gains, the government tells you that you don’t have to pay tax on it. Keep the profits, they say. Does that peak your interest? Do we have your attention, yet?

The Benefits Of Registered Retirement Savings Plans or RRSP In Canada

If you are among the one in three (3.8 to be slightly more accurate) Canadians currently taking advantage of the federal government’s most generous form of tax relief - the Registered Retirement Savings Plan - commonly known as the RRSP, then you already know what we’re talking about. For those of you that don’t but would like to learn more, read on.

A RRSP is a Registered Retirement Savings Plan that lets an individual defer taxes on money saved today. The idea is to encourage people to save by letting them put off paying taxes until they retire - when most people will be in a lower tax bracket, and will pay less tax on those savings. Any money you earn in the RRSP (via capital gains, dividends, distributions) is usually exempt from tax for the time the funds remain in the plan. However, you generally have to pay tax when you cash in, make withdrawals, or receive payments from the plan.

Allow me to outline 5 benefits to opening and contributing to an a Registered Retirement Savings Plan (RRSP).

Tax Relief

  • Money contributed to an RRSP can be deducted from your taxable income, meaning most people get tax refund cheques after filing their taxes. For example, a person in the middle tax bracket whose marginal federal and provincial tax rate is around 42%, (depending on the province you reside in), would receive a tax refund of $2,100 on a contribution of $5,000. Therefore, the “real,” cost of your contribution is only $2,900 but the full $5,000 is still working inside the RRSP.

Tax Shelter and Benefits of Compounding

  • Monies inside an RRSP are allowed to grow tax free and the magic of compound interest, that is earning interest on your interest, results in exponential growth of your savings. Consider this: Should the monies in your RRSP grow at 8% (compounded annually), it would take approximately 9 years to double your money. As an example (and this is certainly not a recommendation), let’s say you invested in the Sprott Canadian Equity Fund, managed by Eric Sprott, that has returned 19.5% since inception in 1997. Your investment would have doubled every 3.8 years (approximately) if you had not made any withdrawals. Sound enticing enough…?

Home Buyer’s Plan

  • Being the masterful investor that you are, having doubled your money tax free every 3.8 years, you may now want to use the funds in your RRSP to purchase a house. Enter: The Home Buyers’ Plan. The Home Buyers’ Plan (HBP) program allows you to withdraw up to $25,000 (after January 27, 2009), from your Registered Retirement Savings Plan (RRSP) to buy or build a qualifying home for yourself or for a related person with a disability. Should you meet all the conditions for participating in the Home Buyers’ Plan, you have up to 15 years to repay the amount that you withdrew, without a penalty. Generally, for each year of your repayment period, you have to repay 1/15 of the total amount you withdrew until the full amount is repaid to your RRSP. To avail of the Home Buyers’ Plan, complete Form T1036, Home Buyers’ Plan (HBP) - Request to Withdraw Funds from an RRSP. Upon completion, hand over the form to the financial institution that administers your RRSP, who will complete Area 2 and not withhold tax from the funds you withdraw.

Lifelong Learning Plan

  • Let’s say buying a home is not your first priority, instead you want to go back to school and upgrade your academic credentials. Once again, under the Lifelong Learning Plan (LLP), you can withdraw funds from your RRSP to finance training or education for you or your spouse or common-law partner. Should you meet the conditions for participating in the Lifelong Learning Plan, you can withdraw up to the annual LLP limit of $10,000 in a year, and up to the total LLP limit of $20,000 over the period you are participating in the Lifelong Learning Plan. You have up to 10 years to repay the amount that you withdrew, without a penalty. A repayment is a contribution to your RRSP that you designate on Schedule 7 of your tax return as a repayment under the LLP. To avail of the Lifelong Learning Plan, complete Form RC96, Lifelong Learning Plan (LLP) - Request to Withdraw Funds From an RRSP, for each RRSP withdrawal that you make. Upon completion, hand over the form to the financial institution that administers your RRSP, who will complete Part 2 and not withhold tax from the funds you withdraw.
The cheapest RRSP is available at Questrade Discount Brokerage. No annual fee, no fee to open, and no inactivity fees. Industry leading low commissions at 1¢ per share. $4.95 minimum/$9.95 maximum. Plus, exclusive to Questrade – the ONLY gold RSP in Canada. Questrade is also the only Canadian brokerage that allows you to hold and trade USD in registered accounts – including tax-free savings accounts – without having to pay forced currency conversion fees.

Mental Security

  • While this may not be a tangible benefit, contributing to your RRSP, will likely help you sleep better at night as you revel in the comfort of knowing that you are saving for a secure and comfortable retirement.

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