Retirement rendez-vous - Chronicle N°15

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How do RRSPs work?

“What types of investment products do you have?” This is a question I often ask new customers in order to better help them plan for retirement. Often the answer is “I have an RRSP.” But did you know that an RRSP is not an investment product?

Charles de Kovachich: Investment Advisor


A registered retirement savings plan, or RRSP, is not a type of investment; rather, it is a retirement savings instrument. In other words, it is a "container" for your investments (such as guaranteed investment certificates, mutual funds, term deposits, and more). The Government of Canada introduced RRSPs in 1957 as a way to encourage people to finance their own retirements. Over the years, the retirement period we need to save for has grown considerably longer. Today, it can last as long as 40 years!

The greatest benefit offered by RRSPs lies in the fact that they are a tax shelter in which your investments can grow. Your RRSP contributions are deducted from your annual taxable income, reducing your taxes payable. These contributions are then invested and only become taxable when they are withdrawn. The withdrawals usually begin only once you have retired, when your tax rate is usually lower than the rate you paid as an active member of the work force.

The maximum authorized annual contribution is 18% of your earned income from the previous year, to a maximum of $22,450, the contribution ceiling established by the Canada Revenue Agency. This ceiling will be $22,970 in 2012. However, if your contributions in one year do not reach the maximum threshold, the unused portion is not lost; it can be deferred and added to the total contribution of subsequent years.

To know your total RRSP contribution room, check the notice of assessment you received from the Government of Canada after they processed your last tax return. And remember, you can always consult your advisor, who can help develop an investment strategy that suits your needs. He can also tell you if the TFSA may be a better option in your situation.


Charles de Kovachich

Investment Manager

National Bank Financial

Organizations: Retirement chronicle National Bank

Geographic location: Canada

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