In Canada, a Registered Retirement Savings Plan (RRSP)is used as a special savings account designed to encourage people to put away money for their retirement. The account is registered by the government for the contributor to use.
Contributions to the plan are tax deductible and any investment growth inside the plan is not taxed. When money is finally taken out of the plan for retirement, it is taxed as income. Taxation is thus deferred over a period of time and the compounding effect of the investments will benefit the contributor.
There are limits to the amount that can be put into the account. These contribution limits are set by the government and are adjusted from time to time as the cost of living increases. For 2007, the limit is $19,000, increasing to $20,000, $21,000, and $22,000 in 2008, 2009, and 2010, respectively. If one is contributing to other Registered Pension Plans, then the amount that can be put into RRSPs is adjusted by a calculation known as a Pension Adjustment.
Registered Retirement Savings Plans are offered at many financial institutions in Canada and are quite flexible in terms of the types of investments that can be held. Some plans are geared specifically towards interest bearing investments like term deposits or Guaranteed Investment Certificates. Others can contain stocks and mutual funds.
The money must be taken out by the age of 69 either as a lump sum or rolled into an annuity or Registered Retirement Income Fund (RRIF). However, there are no restrictions on taking out money before that except for locked-in RRSPs which are meant to only fund retirement. In fact, RRSPs are an excellent why of financing an early retirement since the contributor has total control over when to withdraw the money. It must be kept in mind, however, that taxes are withheld from withdrawals.
RRSPs can be used for a couple of non-retirement related purposes without having taxes withheld. RRSP funds can be used to buy a first home or a home for a disabled relative. They can also be used to finance training for the contributor. In both instances, the amount withdrawn has to be paid back to the RRSP within a specific time frame and there has to be proof that the funds are being used for those purposes. If conditions are not met, then the withdrawals will be taxed as income.
The contributor can also set up a plan for his or her spouse and split the contribution limits between the two plans. This could have significant financial benefits when withdrawing funds in retirement by lowering tax brackets.
This description provides an overview of the main features of RRSPS. To find out more, go to the Canada Revenue Agency website at www.cra-arc.gc.ca.