Registered Retirement Savings Plans (RRSPs)

Registered Retirement Savings Plans (RRSPs), are used to defer income tax until retirement. The principle (i.e., the amount invested) is deposited into a qualified plan that is issued by a financial institution (e.g., bank, trust company, life insurance company and mutual fund company). Both the principle and the interest are exempt from tax while in the RRSP account. However, withdrawals from an RRSP account are added to the plan holders income and are subject to tax. Upon retirement the plan is surrendered and the full amount of the RRSPs (i.e., principle and interest) are added to the plan holders income. This potential tax burden may be eased with annuities or Registered Retirement Income Funds (RRIFs), both of which provide a mechanism to distribute the RRSP income over several years.

Advantages:

• reduces taxable income, and hence, may also reduce the personal tax rate
• RRSP deposits defer the taxation of this portion of your income
• within the RRSP, compounding interest is exempt from tax
• customized contribution plans provide great flexibility (e.g., monthly, per paycheck, annually)
• may be converted to a RRIF at retirement
• may be converted to an annuity at retirement
• upon the death of the plan holder, proceeds may be rolled over to the spouse

Disadvantages:

• Deposits contributed from income in a given tax bracket may be withdrawn in a higher tax bracket at retirement.
• upon death, the proceeds are added to the earned income of the plan holder, unless they are rolled over to the spouse.
• may be subject to seizure from creditors.

For additional information or answers to specific questions please contact our office.