What You Need to Know about Canadian RRSPs – and How to Lower Your Taxes

Registered Retirement Savings Plans (RRSPs) are investment accounts designed to help you save for your retirement.

As a Canadian government-regulated retirement savings vehicle, RRSP’s have special tax benefits, such as reducing the amount of income tax you pay each year.  In addition, the money you save has the potential for years of tax-deferred growth, because you only pay taxes on the amounts you withdraw.

You can find RRSPs through chartered banks, trust companies, and other financial institutions.

The only people who can make contributions to an RRSP are those who have “earned income” taxable in Canada. Earned income includes your salary, self-employment income, alimony, and maintenance income and net rental income. However, it does not include income from pensions or investments. The CRA (Canada Revenue Agency) issues “Notice of Assessment” statements to individual taxpayers, letting them know what their RRSP contribution limit is for the coming year.


Using your spousal RRSP can lower your tax bracket

Obviously, the more taxable income you have, the higher your tax bracket, which means you have  more reasons to try to find ways of lowering your tax burden. One way of doing this if you’re married, or have a common-law partner, is to use a spousal RRSP to split taxable income as evenly as possible. Not surprisingly, this is called “income-splitting” and here’s how it works: with a spousal RRSP, you put all or part of any allowable RRSP contributions into a RRSP in your spouse’s name. While you’re contributing to a spousal RRSP, you reap the rewards of lowering your tax burden while building a retirement nest egg for your partner or spouse. Because money withdrawn from a spousal RRSP will be considered part of the taxable income of your spouse or partner, this type of investment is best in situations where your spouse would otherwise have little or no retirement income while you would have a significant amount.

Another advantage to a spousal RRSP is that when you both withdraw your RRSP savings when you’re retired, the combined tax you owe as a couple is often lower than it would be if all your savings were in a single RRSP.

Speak Your Mind


Related Posts (YARPP)