Registered Retirement Savings Plan (RRSP) - Tax Deductible and Tax Deferred

Registered Retirement Savings Plans (RRSPs) are the best way for Canadians to save for retirement. They have many features that should make them central to every Canadian’s investment strategy.

Most people know that RRSPs are the primary way the government has incented Canadians to save for retirement. With fewer and fewer employees getting company sponsored pensions and the Canada Pension Plan (CPP) and Old Age Security (OAS) pension not offering sufficient funds for a comfortable living at retirement, most Canadians have a least something invested in an RRSP.  Savvy investors have taken full advantage of them by maxing out their investments ($26,010 in 2017 or 18% of earned income) as the RRSP has several very important benefits.

1. You get immediate tax savings since the contribution drops your taxable income.  In other words, you get taxed as if you never had earned that money, often keeping you out of high tax brackets.

2. Any return on the investment you make is tax-free until withdrawal (with the idea that you’ll withdraw it in retirement when you have lower income and therefore pay lower taxes).

3. Automated deductions at source if your employee administers the RRSP. According to Statistics Canada about 40% of Canadian employees have access to an RRSP (2015) at work. When offered by the company, you can usually set up to have your investments taken out of your pay each pay period. It is much easier to save if you don’t even touch the money!

4. A company match for some employees. This final benefit is the most important of all to those of you lucky enough to have it. Many companies offer company matches to encourage saving for retirement. In this case the company will match your contributions in some way (often dollar for dollar) up to a limit (perhaps 2-3%). This contribution by your employer is free money to you, making it even more beneficial to invest if an employer match is offered.

There is no better way to save for retirement than employer-matched RRSPs, so try to put as much as you can afford into your RRSP as early as possible. Reducing your tax rate, getting an employer match in many cases and enjoying the benefits of compound interest are powerful reasons to consider regularly investing even a small amount as early as you can. If you only do one piece of investing for retirement your whole life, try to maximize your RRSP contributions each year. If you work for 30-40 years and you do a good job of maxing out your RRSPs, you should be in good shape for retirement. For example, if you can invest $25,000/year (current maximum) in RRSPs for 40 years (25 to 65), then you’ll be sitting on a nest egg of $7.6 million dollars at age 65 (at 7%). Of course, it is very difficult to maximize RRSP contributions each year but you can see the power if you even get close to achieving this.