There are pros and cons to opening a RRSP account. A RRSP is a tax-deferred account that can be opened when you start earning income recognized by the Canadian government. Before turning 18, you can contribute a limited amount to your RRSP account. After 18 is the only time you can contribute more than 2000 dollars. You can contribute 18% of your previous year’s earned income plus any unused contributions from previous years minus your pension. To avoid this calculation, refer to the RRSP contribution limit stated on your Notice of Assessment from Canada Revenue Agency. You get a Notice of Assessment after you submit your tax return.
Pros
Decrease Taxable Income
Putting money in your RRSP decreases your taxable income. Therefore, you will either pay less taxes or get money back from the government.
Tax Free Gains
Any money made from investing (capital gains) in a RRSP are tax free. The main purpose of a RRSP is to let the money grow until you retire. Thus, you can begin to withdraw the money when your in a lower tax bracket. At 71 years old you can convert a RRSP into a RRIF in order to take money out without paying a withholding tax rate. At the end of the tax year, the money withdrawn is added to your taxable income.
Home Buying and Education
Using the Home Buyers Plan or Lifelong Learning Plan you can pull money out of your RRSP to put a down-payment on a home or to pay for education, without paying any withholding tax rate or taxes. You don’t pay interest on this loan and can pay it back slowly by making a minimum payment each year. This minimum payment is a set amount allocated from your yearly RRSP contribution. You should research the different rules for each of these programs to see if it fits your specific needs.
Cons
Withholding Tax Rate
When you take money out of a RRSP before 71 years of age, your charged a withholding tax rate.
- Taking $5,000, means the withholding tax rate is 10%.
- Withdrawing between $5,001 and $15,000 means the withholding tax rate is 20%.
- Removing more than $15,000 means the withholding tax rate is 30%.
For example, if you take out $5,000 than you pay a tax of $500 to the government so you’ll only receive $4,500. Also, you have to add the $5,000 to your taxable income, which means you may pay more taxes at the end of the tax year.
Conclusion
In conclusion, there are pros and cons to having a RRSP account that is based on your individual financial situation, such as job salary and pension, . It would be beneficial to use a RRSP if you make a high salary, you know you won’t be needing the money for a very long time, and if your job doesn’t have a pension and you need a savings vehicle for retirement.
A TFSA is a more flexible account for growing your money tax free and being able to withdraw money without a fee.
Refer to the link below for choosing between a TFSA and a RRSP:
Choosing between a TFSA and a RRSP
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