In Canada, where social security is one of the best in the world, an “investment vehicle” such as the Registered Retirement Savings Plan (RRSP) would seem like overkill. This is especially true with the presence of government sponsored retirement plans such as the Canada Pension Plan (CPP) and Old Age Security (OAS). However, statistics show that many Canadians register a portion of their earned income in the RRSP.
The whole concept of the RRSP revolves around deferred taxation. Now, who wouldn’t want to pay taxes on a portion of earned income at a much later date? In the case of investments involving Life Insurance products, you can even defer it after you’re dead! Ottawa really deserves a major round of applause for the creation of the RRSP way back in 1957.
You only have to register (a major keyword) to the Canadian government a portion of your annual earnings through the RRSP to enjoy tax sheltered status. The RRSP enables the contributor to enter a contract with the government until he/she chooses to terminate it, or in cases wherein the fund owner substantially cuts back on full employment (or self-employment).
The concept of the RRSP also involves a fundamental principle that people should have the spending power to keep the national economy rolling. If you ever wonder why Canada has got one of the most stable financial institutions, including Insurance, Banking and Investment industries, just think about where all the savings registered under the RRSP are invested into.
There is a limit as to how much you can set aside in the RRSP. As of 2010, a ceiling of 18% of all earned income coming from all sources (salaries, commissions, self-employed earnings after expenses, bonuses, disability payments etc.) or a maximum of $22,000, whichever is higher, can be “invested” into the RRSP.
The genius behind the RRSP is that the government allows you (they actually encourage you) to invest whatever amount you save in the fund. You can use it to buy a house (you can actually avail of a loan if you’re a first time buyer; after 4 years residency), invest in equities, bonds, GICs, Life Insurance products etc. What happens is you only get taxed on interest, dividends and capital gains tax (if you choose to cash in on an investment) and not the principal amounts.
It is never too early or too late (almost) to start an RRSP account. There is no minimum age for as long as the contributor earns income. However, there is a maximum age of 71 (which is “fair” enough) to open an RRSP account. In any case, it is a great way to address financial stability during retirement years. Maybe you’re actually thinking of early retirement by converting your RRSP to an annuity (which is why an RRSP is also great for those belonging in higher tax brackets) or maybe you’ve plan to share your blessings to your favorite charitable institution.
Whether you’re hedging for the future or planning to leave a legacy to your family, the RRSP is one of the greatest features of Canada’s social welfare programs.