Canadian RRSP Saves Tax
In Canada the Registered Retirement Savings Plan is a tax deferral.
In Canada, taxpayers can save money by contributing to an RRSP. The return on an investment made inside an RRSP is taxed when the RRSP is collapsed.
Canada's income tax laws use the Registered Retirement Savings Plan (or RRSP) to encourage Canadian taxpayers to save money for retirement.
The RRSP is a special kind of savings account, as was introduced in the article Canadian RRSP is a Savings Account.
One of the big differences between an RRSP and an ordinary savings account is that there is a tax savings to be had by contributing to an RRSP and by leaving money inside the RRSP to grow until the taxpayer withdraws it.
Save Money by Contributing to an RRSP
Every dollar you put into an RRSP is a dollar you don't have to pay tax on. For example, if you pay tax at the marginal rate of 40 percent, then by contributing $1,000 to your RRSP, your taxes will be $400 less than they would otherwise have been.
Save Money by Leaving Money Inside the RRSP
Not only do you save money by contributing to an RRSP, the idea is that the money inside your RRSP will grow over the years, by being invested in things that will accumulate interest, accrue capital gains, and generally increase in value. Not all investments go up, but the idea is that you will aim to make a profit rather than take a lot of risks and make a loss on your RRSP investments, since that is your retirement fund.
During the years your cash is inside the RRSP, you do not pay tax on the money it earns. The theory is that these are the years when you are earning your maximum as an employee or self-employed person. You are also paying tax at the highest rate of your life.
After retirement, when you begin to withdraw money from the RRSP, you will probably be in a lower tax bracket. Thus your investment earnings and gains will be taxed at a lower rate than if they had been taxed in the year you made those earnings and gains.
The RRSP is a way of deferring tax on investments and saving for your retirement in a tax-effective way.
