The following is an Excerpt from my first book Invest Now. Invest Now is jam-packed with timely information and timeless advice for the beginning Canadian investor. Invest Now covers a broad range of topics including RRSP. Invest Now will be published in a few weeks.
What Is An RRSP?
An RRSP (registered retirement savings plan), or registered account, is not something you actually buy. This is just an account type, and you buy qualified investments to hold inside that registered plan. Think of the RRSP as an umbrella sheltering you from the sun. Think of the sun as the Canada Revenue Agency. As long as you are under the umbrella, you are protected from the heat. As long as you are inside your registered plan, you are protected from taxes.
Advantages of an RRSP
- Deposits generate tax receipts to provide tax breaks.
- If the account generates income, no taxes have to be paid, because income is sheltered.
- If you sell your holdings and achieve profits, you pay no taxes on capital gains, but you pay withholding taxes on withdrawals.
- You pay no taxes on growth and switches made inside your account, as long as you are not going outside the registered plan
Disadvantages of a Registered Account
- The account is registered with Canada revenue Agency (CRA). That’s where the term registered comes from.
- You are only allowed to deposit so much money.
- Withdrawals are restricted.
- You are taxed on the amount you withdraw. The more money you withdraw, the more taxes you pay. See withholding tax rates listed at the end of this chapter.
- You can’t keep this account forever. The account has to be terminated once you are 71, and you have to convert this account to a Registered Income Fund (RIF), from which you have to receive annual income by law. Also, you can take out all your money once you are 71, but this is not a good idea, as you have to pay hefty taxes.
First Published: ADawnJournal.com Feb 26, 2008