5 Things To Know About RRSP Accounts

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For a lot of Canadians planning for retirement, an RRSP is the go-to savings option. If you’re not familiar with this, or you simply haven’t started planning your own retirement yet, RRSP stands for “Registered Retirement Savings Plan.” It has been an option for Canadians for decades, and is arguably the primary retirement planning option aside from work-related plans.

An RRSP is a virtual necessity for any Canadian with an eye toward his or her future. But it’s still wise to be thorough when exploring any kind of long-term investment, so in this post we’re going to go over some of the things you ought to know about RRSPs.

1. There Are Different Types of RRSPs

While an RRSP is often discussed as a single type of retirement plan — and is, in a way — there are different versions of this sort of account. An individual RRSP is what people are typically referring to, and is exactly what it sounds like: a private account that you contribute to and benefit from solely and directly. But there are also “spousal RRSPs” (in which people in a marriage can contribute to one another’s accounts) and “group RRSPs” (bundled workplace arrangements in which contributions are taken out of pay). The accounts work similarly, building funds over time for retirement, but they do differ slightly.

2. You Can Invest 18% of Your Income

An RRSP account allows contributors to invest up to 18% of their income from a given year. For perspective, recent year estimates show that Canadians earned an average of $48,400. This in turn would mean that the average individual in Canada could have contributed 18% of $48,400 for that particular year, or $8,712. Contributing more is possible, but brings about an additional tax penalty.

3. Withdrawing Funds Comes with Penalties

It is also possible to withdraw funds from your RRSP account at any time. While the goal is of course to leave money put (and collect compounding interest) ideally until you decide to retire, it’s still your money, and is thus accessible to you. However, withdrawing your RRSP early does come with some penalties. The most direct of these penalties is that you will be taxed for what you withdraw. However, the money you pull out also stops compounding, which means that even if you quickly replace it, the replacement money will not be earning as much towards your retirement.

4. Most Leave Money on the Table

It’s worth knowing as well that a majority of Canadians actually fail to take full advantage of RRSPs, even if they’re using them. Regarding the 18% threshold mentioned previously, surveys have found that only about a third of Canadians reach their RRSP contribution ceiling regularly. This shouldn’t necessarily affect your personal strategy, but it’s worth knowing that by contributing the maximum on a regular basis you can in theory put your retirement savings in better shape than those of most Canadians.

5. An RRSP Should Be Just Part of Your Plan

It’s also vital to recognise that contributing to an RRSP doesn’t have to be your entire plan. In looking more comprehensively at the job of preparing for retirement in the past, it was pointed out that it’s a good idea to meet with a financial professional and develop a full-fledged plan. This is true even if you’re early in your retirement planning process. An RRSP account can be a wonderful tool for building on your income and putting away money for retirement. But careful consideration and professional input can still help you to find additional ways to save as well.


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