It’s RRSP season, and yet there is always confusion as to the benefits and rules of this tax sheltering financial device. 

GF&F Financial provides this breakdown to help set the record straight.

 

Registered Savings Plan Basics

Registered Retirement Savings Plans (RRSPs) work by deducting the amount you contribute from your income, therefore lowering the overall tax you owe. Growth in a RRSP is deferred until the money is withdrawn.

 

Advantages

Besides the immediate tax savings, RRSPs also work as a way to defer taxes until you take them out at a later date. As most people tend to have less income following retirement, this allows for the money to be withdrawn and less taxes to be paid.

 

Who can contribute?

As long as you are employed and expect to be in a lower tax bracket when you retire, RRSPs will provide a benefit to you.

 

What if I don’t have a lot of money to for a RRSP?

It’s all about making the most of what you have. Start small with regular contributions and watch your savings grow when taking compound interest into account. RRSP loans which can be paid off quickly can also work well. One strategy would be to take the proceeds of your tax refund and put it towards the balance of the loan. Most RRSP loans can also be taken out with fairly attractive interest rates.

 

Are TFSAs better than RRSPs?

A TFSA or Tax-Free Savings Account is a great tool to complement any savings strategy. Similar to a RRSP, a TFSA’s unused contribution room can be carried forward to future years. In certain situations, a TFSA may be more attractive as they are more flexible than RRSPs. For example, a university graduate may start out with a lower tax bracket and find greater benefit with TFSAs. As they advance in their career, the benefit may be greater from RRSP contributions when their income is higher.

 

Remember, everyone’s situation is different based on their plans and needs. Whether it’s a TFSA or RRSP, a comprehensive financial review from G&F can help you build the right plan or keep your objectives on track.

 

RRSP Quick Facts

RRSP Contribution Limit: 18% of your previous year’s income or $22,450

RRSP Contribution deadline: February 29, 2012

 

The information in this article is provided as a general source of information and should not be considered personal tax or investment advice.

 

For more information, contact G&F Financial Group to create your personal savings strategy today. Visit www.gffg.com for a list of our branch locations.