5 Reasons to Have an RRSP

Craig Sebastiano
by Craig Sebastiano April 19, 2016 / No Comments

There are many benefits to having an RRSP. Saving for retirement is often the main reason why most people get an RRSP but they can also be used for other purposes.

Here are five reasons to open up an RRSP:

1. You want to start saving for retirement

RRSPs were created in 1957 to help Canadians without employer pension plans save for retirement. Back then, most companies provided their employees with a workplace pension. Fast forward 60 years and two-thirds of Canadians don’t have a pension plan, which means RRSPs are even more important. If you don’t have a very generous pension, you’ll need to save for retirement on your own because the Canada Pension Plan and Old Age Security likely won’t provide you with enough income in your golden years.

2. You want to borrow to buy a home or pay for your education

Traditionally, RRSPs were only for your retirement savings. But now you can use your RRSP savings to help buy a house or to fund part of your education. Under the Home Buyers’ Plan (HBP), first-time homebuyers are allowed to make a tax-free withdrawal of up to $25,000 to use towards their down payment or to cover closing costs. If you have a partner or spouse, you can each withdraw as much as $25,000 for a total of $50,000. You need to begin repaying the withdrawals in the second year after buying your home over a 15-year period.

You can also withdraw up to $20,000 from your RRSP to cover full-time education or training costs for you or your spouse/partner under the Lifelong Learning Plan (LLP). You need to repay what you borrowed as early as two years after the last withdrawal over a 10-year period.

3. You want to reduce your tax bill

Contributing to an RRSP will reduce the amount of tax you pay. If you live in Ontario and have a marginal tax rate of 29.65%, you’ll save $29.65 in tax for every $100 you contribute. But if your marginal tax rate is higher, you’ll save even more in tax. For example, if your marginal tax rate is 47.97%, you’ll save $47.97 in tax for every $100 you contribute.

4. You want tax-free savings growth

An RRSP will allow your money to grow on a tax-free basis. If you have a non-registered high-interest savings account or hold a GIC in a non-registered account, you’ll need to pay tax on any interest income.

Let’s assume you want to save $5,000 in a GIC and can earn 1.95% in annual interest. If you hold the GIC in a non-registered account, live in Ontario, and pay a marginal tax rate of 29.65%, you’ll have to pay $28.91 in tax on the $97.50 in interest income you earn. In an RRSP, you won’t need to pay any tax on interest income.

Non-registered account RRSP
Interest income $97.50 $97.50
Marginal tax rate 29.65% 29.65%
Taxes owing $28.91 $0

 

5. You’ve run out of TFSA contribution room

Have you maxed out your TFSA and run out of room? Then you can continue to shelter your investment income and capital gains in an RRSP. Every Canadian gets the same amount of TFSA contribution room annually (currently $5,500). But the amount you can contribute to an RRSP is determined by how much money you make.

Your contribution limit is 18% of your previous year’s earned income up to a maximum of $25,370 in 2016. So if you expect to earn $90,000 this year, you’ll have $16,200 in RRSP contribution room.

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Flickr: KMR Photography