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Who should invest in Registered Retirement Savings Plan
Any Canadian who files their income tax return with the federal government is eligible to open a Registered Retirement Savings Plan (RRSP). For married couples or people in common-law relationships, if one partner earns more annual income, the couple can choose a spousal RRSP. This income-splitting strategy can help reduce a couple’s overall tax payment when they withdraw funds from their RRSP.
In addition, the Home Buyers’ Plan lets first-time home buyers withdraw up to $25,000 from their RRSP to buy or build a qualifying home. Also, under the Lifelong Learning Plan, you can withdraw up to $10,000 annually (maximum amount of $20,000) from your RRSPs to pay for education or training for you, your spouse or common-law partner.
Each year, Canadians can contribute whichever is less – 18% of their annual income or the maximum amount set by the Canada Revenue Agency – to their RRSP. When you contribute to an RRSP, your money grows tax-free inside the plan.
Since tax is deferred on RRSPs until funds are withdrawn, RRSPs may be particularly useful for wage earners whose income will be lower in retirement. For example, if you’re earning $80,000 per year and subject to 25% in tax, but expect to be have less annual income in retirement (e.g., $40,000 and subject to 15% in tax), it would make sense to put money into an RRSP while you’re working and then withdraw the money in retirement so that you would pay taxes at a lower rate.
Your decision should be made with the help of someone who really understands the product.