What is an RRSP?
Categories: Investing
RRSP stands for Registered Retirement Savings Plan. RRSPs are tax sheltered investments to encourage people to save for retirement.
RRSPs have two main advantages over a normal investment. First, a certain amount of the money you contribute to an RRSP every year can be used to offset your income tax. For example, if you earned an average salary in Alberta, a $1,000 RRSP contribution could allow you to claim back over $300 on your income tax.
In a normal investment, you would pay income tax on the interest or gains that your investment earns. This is called capital gains tax. The income and gains on your RRSP are not taxed until you actually take money out of it. This can add up to real savings over the long term.
Start saving early! The sooner you start saving, the more money you will have in your RRSP when you retire. Compound interest adds up dramatically over time.
The amount you are allowed to contribute to an RRSP is limited each tax year, depending on your salary. You should receive a Notice of Assessment from Revenue Canada informing you how much you can contribute over the coming tax year.
The current annual limit is 18% of the income you earned in the previous tax year, up to a maximum of $19,000 for 2007. The 2008 maximum is $20,000.
February 29, 2008 is the deadline for RRSP contributions for the 2007 tax year.
RRSPs are meant to be long-term investments, put towards retirement savings. However, this does not mean that your money is locked away. You can withdraw funds from an RRSP at any time. However, you will have to pay tax on any gains.
Your local bank, credit union or financial planner should be able to advise you on your RRSP options. They can also tell you about specific RRSP products. Alberta credit unions and financial planners may be able to suggest RRSP portfolios that focus on Alberta investments.
You can find a few useful Alberta RRSP tips, here: Chartered Accountants of Alberta RRSP Tips (PDF).
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