In its simplest terms, an RRSP or Registered Retirement Savings Plan is a way for Canadians to park money that they have earned into an account that shelters it from government taxation until it is withdrawn. The idea is that the money stays put in the account during higher earning years and isn’t taxed until retirement when, presumably, earned income is a whole lot less. This money is now taxed at a lower rate as a result of the lower overall income.
In the year the money is put into the RRSP account, the benefit is to reduce the amount of tax owing for that year – not to eliminate it. A major misconception is that the PURPOSE of an RRSP is to bring your balance owing to Canada Revenue Agency in the current year to ZERO. Although it will help to reduce taxes owing for that year, there is nothing magical about getting a tax refund and that should not be the goal of an RRSP.
In January / February, I get clients who want me to do a review of their 2013 tax returns to see what the magic number is for their RRSPs. One client earns $300,000 and pays $140,000 in income tax and wanted to know how much RRSP to buy. My answer was the maximum allowed in his RRSP limit which was about $23,000. The calculation is NOT based on this year’s tax return, it is based on your required income for age 65 (or 70) to age 90.
The purpose of an RRSP is to have enough money to retire on. It is, and should be, a part of your savings and retirement strategy as you go forward from year to year. This is financial planning and it is a part of what I do. I would be happy to meet with you to discuss your financial planning strategy and how it ties into your taxes and tax strategy. By all means connect with me if this is of interest to you.
Prudent use of an RRSP is one way to build a nest egg for a happy and comfortable retirement. Understanding what it is all about is a good first step to putting this process in place.
Written in collaboration with Herb Holst from Quantum Holstinc