A Retirement Savings Plan or RSP as they say, is one of the best ways to help ensure your financial security. I had my doubts but considering it has been around for over 60 years, I figured there had to be something to this RSP thing. And guess what, there is!
The back story is that they were introduced by the Canadian Government to promote savings for retirement by employees and self-employed people. Hmmm, still seems relevant today but I also discovered that RSPs provide a lot more than just retirement savings. A few terms that piqued my interest were tax savings, income splitting and most importantly…refund. Read on to learn just how relevant this RSP opportunity can be.
By contributing to an RSP, you reduce your taxable income by the amount of the RSP deposit. The deposit grows and compounds in a tax-sheltered environment. As a result, you only pay tax when you withdraw the money. Since many of us will have a lower tax rate in retirement than during our working years, this can result in you and I paying significantly less tax overall.
Since RSP contributions reduce your taxable income, most of us who make an RSP deposit will receive a tax refund when we file our income tax with Canada Revenue Agency. The refund amount is a percentage of your RSP contribution. The more you contribute, the greater the refund.
When you retire, your RSP can be changed to a Retirement Income Fund (RIF). This is a retirement income vehicle that is designed to provide you with regular income payments from your savings. If your spouse has a higher income during retirement, up to 50% of the RIF income can be allocated to you. This can help reduce the overall taxes.
Be your own bank
Need some money to help you with a down payment? Thinking of going back to school? Use your RSP to help you realize these things. The Home Buyers' Plan allows you, a first-time home buyer, to withdraw up to $35,000 tax-free in a calendar year to buy or build your first home. The repayment period begins the second year after you withdraw the funds and you have up to 15 years to pay the money back. With home prices on the rise, why not tap into additional resources to increase your down payment.
The Lifelong Learning Plan allows you to go to school or go back to school. Whether for you or your spouse, you can withdraw up to $20,000 tax-free to cover tuition and education expenses. The repayment period gives you 10 years to repay the money you borrowed.
Convert your RSP
You can transfer your RSP into a RIF or Payout Annuity when you retire. You will pay tax on the regular payments you receive each year but if you are in a lower tax bracket in retirement, you will pay less tax.
Intrigued about RSPs now? Speak to your financial advisor about how RSPs can benefit your retirement savings plan.
This information does not constitute legal, tax or other professional advice. Information is believed to be accurate, but accuracy is not guaranteed.