How RRSP’s Can be a Great Investment for Canadians
May 26, 2020
A Registered Retirement Savings Plan (RRSP) is one of the great tools for Canadians to save money for their retirement life. Investment in RRSP is considered as ‘tax-deferred’ which means that your money is only taxed when you withdraw it. For most Canadians, RRSP is not only an investment tool but you can also minimize your tax liability as the contributions made in this plan are tax deductibles. Contributions in RRSP can help you achieve many objectives of your life. There are many benefits for which most Canadians are inclined to invest in this plan as follows:
1) RRSP Home Buyers’ Plan
RRSP Home Buyers’ Plan is a program that allows you to withdraw from your RRSP to buy or build a home for yourself. If you are contributing to more than 01 RRSP accounts, you can withdraw funds from each of your RRSP accounts. There would be no withholding tax if you withdraw funds up to $35,000 or less. There are certain conditions that you need to fulfill to be eligible to participate in RRSP Home Buyers’ Plan which are mentioned below:
- RRSP home buyers plan supports for only the first-timers
- You must have a written agreement to buy or build a home
- You must be a resident of Canada at the time of participating in this plan
If you comply with above-mentioned conditions, you are good to go with your decision to buy the first house using your RRSP Home Buyers’ Plan.
2) Finance your Education & Training Courses
RRSP funds can be utilized for your education and your spouse’s education under the Lifelong Learning Plan. The Lifelong Learning Plan allows you to withdraw funds from RRSP to finance your full-time education or training programs. You can finance education for your spouse as well. You cannot participate in the Lifelong Learning Plan to finance the educational needs of your children. The withdrawals of RRSP to support your education or training programs are considered as ‘Tax-Free’.
3) Contribution in a Spousal RRSP
Contribution in your spousal RRSP can be a great strategy for tax reduction. You can reduce your tax liability by contributing to your wife’s RRSP who has a lower income. RRSP simply reduces your earned income and if your wife’s taxable income reaches a point where her tax liability becomes zero, the benefit of tax exemptions and the non-refundable tax credit will shift to you and that will enable you to save on your tax liability. In the end, you will have a bigger tax break as your earnings are significantly greater than your spousal income.
4) Borrow to Invest in RRSP
If you are struggling to contribute to your RRSP and you do not have the funds to put into your regular RRSP contribution, you may have the option of borrowing to invest in it. You can finance your RRSP contribution through a low-interest loan which will have dual benefits. The first benefit is that you can contribute without any discontinuity and the second benefit is that you will be able to reduce your tax liability as the ‘loan interest’ is a tax-deductible item that will lower your tax liability.
5) RRSP Contributions Other than Cash
It is not mandatory to contribute to RRSP only through cash. Canadians may have the option to use mutual funds and stocks to make RRSP contributions. When you transfer your stocks and mutual funds, you may have to pay capital gain tax if you have the upward revaluation of your investments. But if you have a downward revaluation, you may not be able to claim the capital loss.
If you want to make the best use of your RRSP contribution and you don’t have the required knowledge, GTA Accounting will help you strategize your RRSP contribution and can enable you to get benefit by converting your RRSP to a great investment tool.