The deadline for your final RRSP contribution for the 2013 tax year is March 3. If you haven’t been making regular contributions to your RRSP you still have time to benefit from investing in one. At the very least you can start preparing yourself for next year’s deadline.

What is an RRSP?

A registered Retirement Savings Plan (RRSP) is a personal savings plan registered with the Canadian federal government. It allows you to save for retirement on a tax-sheltered basis. It is an investment portfolio that can include: RRSP Savings deposits, treasury bills, guaranteed investment certificates (GICs), mutual funds, bonds, and even equities.

What are the benefits of an RRSP?

The main benefit, and of course the purpose, of contributing to an RRSP is to set aside money for your retirement. With this come the added tax benefits.

The first benefit is Tax-Deferred Growth. Any profits made on investments within an RRSP account in the form of interest, dividends, or capital gains are not immediately taxable to you as income. RRSP investors do have to pay taxes on the profits, but this doesn’t occur until the funds are withdrawn.

The second tax benefit is a tax credit. Contributions made to an RRSP, which can be made up to a certain yearly limit, will reduce your taxable income by the amount you contribute, up to a certain point.

For example:

If Bob makes $55,000, the maximum amount the government will allow him to contribute to his RRSP is 18% of his earned income. ($55,000 x .18 = $9,900). Should Bob contribute this amount to his RRSP account he will receive a tax credit in the amount of $9,900. This means that Bob would only have to pay tax on $45,100 of his income. ($55,000 – $9,900 = $45,100).

Where to go from here

Doug Riding, a senior investment adviser says, “most Canadian taxpayers should invest in RRSPs, particularly if they anticipate that their marginal tax rate will be lower in retirement than in their working years. Starting early with an RRSP is one of the best decisions you can make. Save as much as you can as fast as you can (comfortably) and the rest of your financial life will fall into place.”

The best thing to do is speak with a financial advisor who can help you determine the best type of savings for you and your future.

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