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The Registered Retirement Savings Plan – RRSP

Money Manager | Monday, August 23rd, 2010

A Registered Retirement Savings Plan (RRSP) is used throughout a person’s career to allow money to be saved for retirement. These plans are designed to be tax-deferred and are registered by the Canada Revenue Agency. These plans are set up through a financial institution, such as a bank or a credit union. Contributions to a Registered Retirement Savings plan are tax deductible, up to plan limit amounts. Contributions can be made each year of a person’s career, up to December 31 on the year when the owner of the account turns 71 years of age. Because the plans are tax-deferred, money placed in the account can grow faster than it would if it were simply in a savings account. There are a number of different financial investments that can be held in a Registered Retirement Savings Plan, such as income trusts, mutual funds, bonds, and guaranteed investment certificates (GICs). Throughout a person’s career, contributions can be made to an RRSP to save for retirement. Then, after the person retires, these funds can be accessed by purchasing an annuity or by transferring the funds into a Registered Retirement Income Fund (RRIF) so that distributions can be made. Distributions are taxed as regular income, but the bulk of the funds can remain tax sheltered in the RRIF until they are distributed.

Where are Registered Retirement Savings Plans used?

These tax-deferred retirement plans exist under Canadian tax law. The Registered Retirement Savings Plan and Registered Retirement Income Fund are both registered with the Canada Revenue Agency.

What is the difference between having money in an RRSP as compared to an RRIF?

The Registered Retirement Savings Plan is designed to be used during a person’s work career for the purpose of accumulating funds for retirement. Ongoing contributions can be made to these accounts, but these plans are not designed to make distributions or withdrawals. Therefore, when a person reaches retirement age, they are required to transfer the funds from their RRSP into another kind of account that will allow them to use the funds as retirement income. The money in the RRSP can then be transferred to an RRIF so that the person can receive a constant source of retirement income. However, once the funds are placed in the RRIF, the person can no longer contribute additional money to the account. Basically, the two plans differ in that the RRSP is designed to accumulate the funds to save for retirement, while the RRIF is designed to distribute the funds as income after retirement.

Are there different types of Registered Retirement Savings Plans?

There are a number of different Registered Retirement Savings Plans available, which are designed to meet different needs. These include individual RRSP accounts, which are held by a single individual. There are also spousal RRSP accounts which allow a high income earner to contribute to an RRSP in their spouse’s name. There are also group RRSP accounts, which employers can use to allow employees to make regular contributions to their retirement savings.

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