Benefits of RRSP
At this time of year, many people are starting to put together their yearly income taxes and thinking about putting some additional money into their RRSP. An RRSP (or Registered Retirement Saving Plan) is a type of investment account that is designed to help people save for retirement. But is it better than other types of savings? Should you put money into an RRSP or into another type of investment?
To figure this out, it’s important to understand the RRSP benefits. There are a number of different benefits of RRSPs and knowing more about them can help you make your decision.
Benefits of RRSP : Tax Savings
There are a number of advantages to RRSPs. The main one is that an RRSP account provides tax benefits that many other investment accounts do not. The money that you put into an RRSP (up to the limit) is tax free. This means that you do not pay income tax on the money that you place into your RRSP until it is withdrawn. This can lead to significant savings.
With an RRSP, you are able to defer paying taxes on the money in the account for many, many years. This can be a big advantage if you put money in during your prime working years (when you will likely be making the most money) and then take it out after your retirement (when you will be making significantly less). Using this strategy allows you to use RRSPs to lower the amount of income tax that you pay during your working years, choosing to instead pay income tax on a much smaller amount of money when you retire.
RRSP Benefits: Yearly Growth
Another major advantage is that the money put into an RRSP grows inside the RRSP account. If you put money into your RRSP at an early age, it can grow tax-free for many, many years before you retire. This means that you’ll end up with a lot more money than you started with and you’ll likely pay lower taxes on that money later on. The sooner you put money into your RRSP, the more time you’ll have for your investment to compound and to earn interest.
Remember that RRSP contribution limits increase each year and, if you don’t use up your contribution limit in one year, the room is carried forward indefinitely. This lets you put money into your RRSP when your income increases, saving you tax payments each year.