The Registered Retirement Savings Plan (RRSP) is a savings vehicle designed to augment or replace a company pension plan.
Contributions you make today are in pre-tax dollars. Any money you put in is removed from your taxable income in the year that you claim the deduction (you don’t have to claim it in the year of deposit).
Each year when you submit your taxes, the government calculates 18% of your taxable income to be your contribution limit for the next year.
You contribute, and receive a receipt.
At a future date you apply that contribution against your taxable income, and your income is reduced. If you had paid taxes on your entire income, this will result in you receiving a tax refund.
You invest the money in your RRSP. It grows on a tax deferred basis (i.e. you don’t pay taxes on its growth as it grows).
You take the money out of your RRSP. It is taxed as if it was pure income (as if it was interest from a GIC or a paycheck).
NOTE: If you withdraw money from the RRSP, you don’t regain that contribution room. Unlike the TFSA, Once you’ve put the money in the deduction is used. The RRSP is designed as a very long term savings vehicle.
You get the best tax benefit by claiming the deductions when your income is in a higher tax bracket than what it will be when you withdraw the money.
While receiving a tax refund today always feels great, you can maximize the refund by applying the contributions at a later date if you know that you will be getting a pay raise, or bonus, or even large severance later in the year. All of these scenarios could bump you up a tax bracket. Claiming the RRSP contribution at that time could bring your taxable income back down a bracket.
I am able to help you setup your RRSP. In addition, I can assist with a Financial Needs Assessment as well as a Retirement Plan.