Investment Basics: Part 1 - RRSPs

Investments Basics Part 1: RRSP

 

In this series of ‘Investment Basics’, we will go over some of the vehicles Canadians can use to accumulate wealth.

Essentially, in Canada, we (generally) have 5 investment vehicles we can use to accumulate our assets/wealth (6 if you include using a corporation): RRSPs, Open (Non-registered) Plans, TFSAs (Tax-Free Savings Account), Real Estate and CVI (Cash Value Insurance). Each one of them has their pros and cons and each must be used according to each client’s individual situation and goals.

In this Part 1 of the series, we will go over the RRSP, as it is one of the more commonly used and well known in the industry.

What is an RRSP?

An RRSP is an investment vehicle that allows Canadians to grow money tax-deferred (this means you don't pay taxes on the money until it is withdrawn). When a person makes a contribution to their plan, they get a tax deduction for the amount that was contributed. This can be a great thing for those who are in higher tax brackets, and can also help them get into a lower tax bracket.

Any income within the RRSP is not taxable while it is still within the plan and grows tax-deferred until it is withdrawn. The funds can be withdrawn at any time, but not without any consequence. The withdrawn amount gets added to the persons earned income, it would be taxed, and can potentially put them into a higher tax bracket. There are also taxes that are withheld at time of withdrawal, which is based on the amount withdrawn.

A person can keep funds within an RRSP until the end of the year in which they turn 71, at which point it must be converted into a RRIF (Registered Retirement Income Fund).

Why RRSP?

An RRSP can be a great way to invest for your future, if it is done properly. Let’s take a look at a few benefits of the RRSP:

- Tax Deduction
- Tax Deferred Growth
- Possibility of putting you in a lower tax bracket
- You can use funds within an RRSP for First Time Home Buyers plan [HBP] (funds must be repayed within 15 years of withdrawal otherwise they are subject to taxation)
- You can set up a Spousal RRSP to split income and lower the overall household taxes paid
- Unused contribution gets carried forward
- You can use funds within an RRSP for Lifelong Learning Plan [LLP] (funds must be repayed within 10 years of withdrawal otherwise they are subject to taxation)
- In the event of death, the RRSP can be rolled over (i.e. transferred over) to a spouse's or a common-law partner's RRSP tax-free

As you can see, the RRSP can offer several benefits to those, IF it is used properly.

Things to be aware of

Even though there are many benefits to an RRSP, there are also many things to be aware of, that most people are not aware of because they are not told. Some of these things include:

- There is contribution limit (based on previous years income as stated on taxes)

- All growth within the RRSP is considered as "interest income" no matter which type of growth it was (capital gains, dividends, or interest). This means when you withdrawal, you will be taxed at your tax bracket and there are no tax benefits for different types of investments

- You will be taxed on the FULL amount of withdrawal, and not just the growth, within the RRSP

- Once you reach age 71, you MUST either a) transfer the funds into a RRIF (which results in forced withdrawal from the RRSP) b) purchase an annuity or c) withdrawal the amount in full

- You can end up paying more money in taxes in your later years if your income is higher; this could negate any tax deductions you had received in previous years; you can possibly pay more money in taxes in retirement then you saved in the earlier years

- There is a limit that you are able to contribute every year; A Tax of 1% per month applies on the portion of your RRSP contribution that exceeds your RRSP deduction limit and the over-contribution limit of $2000

- Interest on funds borrowed to invest into an RRSP is not tax-deductible (as they would if they were invested into an Open [non-RRSP] Investment)

- If funds are not re-paid within the specified timelines for the Home Buyers Plan and the Lifelong Learning Plan, you will be subject to taxation

What can you invest in?

As mentioned earlier, an RRSP is a VEHICLE, and what you invest into the RRSP would be considered as the ‘passenger’. There are many different options available for investment, such as:

  • Mututal Funds

  • Segregated Funds

  • REITs (Real Estate Investment Trusts)

  • Stocks

  • Bonds

  • MICs (Mortgage Investment Corporations - Private Lending)

  • Real Estate Development Investments

  • ETFs

  • Precious Metals (Gold, Silver etc…)

  • GICs

  • Cash

Contribution Limit

The maximum RRSP contribution limit for 2025 is $32,490. However, if you didn’t maximize your RRSP contribution limit for previous years, you can carry that unused amount forward and add it to the amount of your current maximum. Therefore, your RRSP contribution limit may actually be higher than the this year’s contribution limit.


Now, it is evident that there are many benefits as well as things that you should be aware of before using RRSPs as your investment vehicle. As mentioned before, they can be a great investment vehicle IF used properly. One of the main issues with RRSPs are not the actual vehicle itself, but rather how they are marketed; they're marketed as the "one size fits all, for everybody, in every situation", which is definitely not the case. The traditional industry has not done a great job on educating clients on how RRSPs work and, generally, have not set them up properly. Many ‘Advisors’ are more concerned about ‘getting another account’ that they are not properly educating clients on whether that vehicle is actually right for them.

Having an Elite level Financial Advisor can help educate and guide you on how using an RRSP, if at all, may fit in to your overall plan and benefit you. Every piece of a client’s Financial puzzle should fit in and compliment the other pieces. An integral part of Investment Planning is also looking at Tax consequences - at time of contribution, along the way, and at the time of withdrawal - and to effectively go through the numbers with. Our team of qualified and certified Financial Professionals can do that with you!

 For more information on RRSPs or to get a free consultation, get in touch with us!

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