Unlocking the Power of RRSPs: The Ultimate FAQs Answered

This post is written by Trusted Partner, Equiton. To become a contributing editor, please contact our Real Estate Investor Solutions Specialist, David Maxwell at david@reincanada.com.

Are you looking to save for retirement, reduce your taxes, or achieve specific financial goals? The Registered Retirement Savings Plan (RRSP) is a popular investment account available to Canadians saving for longer-term goals. RRSPs come with many benefits; however, with their many rules and uses, it is not a surprise that many people have questions about them.

With the 2023 contribution deadline of February 29, 2024, approaching soon, it is important to know as much as possible about this powerful investment tool to allow you to make informed decisions regarding your financial future.

Who Can Contribute to RRSPs?
Canadian taxpayers of any age can open and contribute to an RRSP. This includes self-employed, employed, or even those receiving rental income. You can continue to contribute until the end of the year when you turn 71 years old. At this point, funds must be removed from the RRSP or transferred into a plan that provides income, such as a Registered Retirement Income Fund (RRIF).

Why Should You Consider Investing in RRSPs?
If you’re looking to secure your financial future and build wealth, investing in RRSPs might be a good option. RRSPs offer tax advantages, such as tax-deferred growth and potential tax savings. RRSP contributions can be deducted from your taxable income, which could lower your tax bracket and decrease the amount of annual taxes you pay.

Plus, with a wide range of investment options available — from stocks and bonds to mutual funds, GICs, and alternative investments such as private real estate — you have the flexibility to choose investments that align with your risk tolerance and investment preferences.

Can You Lose Money in an RRSP?
Like any investment, there is a potential for loss in an RRSP. The value of your investments can go up or down based on market conditions and the performance of your chosen investments. Though risk is always a possibility, registered accounts like RRSPs are not eligible for tax-loss selling. This is why it’s important to carefully consider your investment choices and diversify your portfolio to minimize risk.

How Do RRSPs Compare to Other Investment Options?
When it comes to choosing an investment option, RRSPs offer unique advantages that set them apart. RRSPs offer higher annual contribution limits than some other registered accounts and contributions are tax deductible on your income tax returns. Additionally, the wide range of investments eligible for RRSPs allows you to customize your portfolio to match your risk tolerance and investment preferences. By comparing RRSPs to other options, you’ll quickly see why they are a powerful tool for building wealth and securing your financial future.

When Should You Start Investing in RRSPs?
Time is a powerful ally. The sooner you start investing in RRSPs, the better. By starting early during your peak earning years, you can take advantage of compound interest and enjoy the benefits of tax-deferred growth over the long term when they are the most helpful. Even if retirement feels far away, don’t delay. An April 2023 Canadian Retirement Survey by Healthcare of Ontario Pension Plan found that a surprising 35% of working Canadians between 18 and 34 have no retirement savings. Every contribution you make now will have a significant impact on your retirement savings down the line.

What are the RRSP contribution rules?
The RRSP contribution limit is 18% of your previous year’s earned income, up to the government’s maximum of $30,780 for 2023. This amount is the same whether you hold one or multiple RRSP accounts with different issuers. Any unused contribution amounts carry over indefinitely, to use when you are financially able.

What happens when you withdraw funds from an RRSP?
When taking money out of your RRSP, consider one of its most powerful tax advantages: tax deferral. Growth in your RRSP isn’t taxed until you make a withdrawal, at which point it’s considered income and taxed at your current rate.

For this reason, you should think carefully about the timing of your withdrawal. Many investors will choose to maximize contributions during their highest earning years and withdraw later in life when they have the benefit of a lower tax bracket.
Upon withdrawal, you permanently lose the contribution room you used to make your initial investment.

How Do RRSPs Fit into Your Overall Financial Strategy?
RRSPs are an essential component of any well-rounded financial strategy. By investing in RRSPs, you can take advantage of tax benefits and enjoy the potential for long-term growth. With a wide range of investment options, you can customize your portfolio to align with your financial goals.

Everyone’s situation is different, which is why it is important to speak with your financial specialist to create a retirement plan that is right for your specific needs.

For more information about alternative investment opportunities and how you could utilize your RRSPs toward private real estate investments, contact Equiton today!

IMPORTANT INFORMATION: This communication is for information purposes only and is not, and under no circumstances is to be construed as an invitation to make an investment in a Fund. Investing in a Fund involves risks. Please refer to the Fund’s offering memorandum for a discussion of the risks of investing in a Fund.