According to recent statistics, 40% of Canadians have uncertainty surrounding their retirement with another 14% expecting to never retire. Do you fall into one of these categories? If so, now is the perfect time to rethink your retirement strategy and weigh the benefits of RRSP. Understanding what an RRSP is and both the tax and non-tax benefits are all important factors to consider well before retirement.
What is RRSP?
A Registered Retirement Savings Plan, frequently referred to as RRSP, is a way for Canadian citizens that are employed or self-employed to save for retirement. Pre-tax money is invested into an RRSP account that grows tax-free until you withdraw the money. RRSPs give individuals the ability to take advantage of compound interest to maximize their retirement savings. The growth of your investments will be determined based on how you allocate your money. For example, many individuals choose to have a diversified portfolio with stocks, bonds, and other investments.
What are the Tax Benefits?
Tax benefits are a great factor to analyze when considering investing money in an RRSP. Contributions to an RRSP are made with pre-tax money. Let’s say you make 1,000 Canadian Dollars per week and you want to put 100 into your RRSP. You would only pay taxes on 900 Canadian Dollars instead of the 1,000 you earned, making an RRSP a great way to reduce your tax burden. Another benefit of RRSPs is that the investments grow tax-free. Instead, if having to pay taxes annually, your money can compound and grow at higher rates each year, putting more money into your pocket when it comes time to retire. In addition, RRSPs present the potential to reduce your tax rate over the course of your lifetime. A family putting away around $5,000 a year can end up with close to $500,000 at retirement.
What are the Non-Tax Benefits?
Users see the most benefits when it comes time to file the tax return, but there are non-tax benefits that should be taken into consideration as well. First, many companies with RRSPs choose to offer an employer match on top of your contributions. This can be a discretionary match, a fixed match based on your income, or a match based on your contribution level. Regardless of the match setup, this means more money in your retirement account with the potential to double your earnings. Furthermore, without an effective retirement solution, like an RRSP, you might never get the opportunity to enjoy life. Many individuals who plan ahead and take advantage of the tax and non-tax benefits have less stress going into retirement.
Understanding what an RRSP is and the potential tax benefits are the first step to taking advantage of the tax savings. RRSP contributions need to be properly reported on your tax return, calling on the need for a qualified accountant, like NRK Accounting. With over 20 years of helping clients realize the benefits RRSP contributions have to offer, NRK Accounting is your trusted tax and accounting expert. Reach out today to see how our team of experts can walk you through taxes for RRSPs.