Registered Retirement Savings Plans (RRSPs)
A Registered Retirement Savings Plan (RRSP) is a specifically Canadian savings and investment account that helps individuals save and accumulate financial assets. According to the Canada Revenue Agency (CRA), an RRSP “is an arrangement between an individual and an issuer (an insurance company, a trust company or a bank) under which retirement income commences at maturity. Contributions are made by individuals and are deductible under the Income Tax Act. Earnings in the plan remain tax-free and payments out of an RRSP are taxable on receipt.”
An RRSP enables an individual with eligible earned income to deposit a sum of money to the plan and the deposited amount is subsequently deducted from the individual’s taxable income for that year or future years. While the deposit remains within the RRSP all income earned and retained by the plan is not included in the individual’s taxable income. In the future, when any portion of the deposit and earned income is withdrawn from the plan, the amount withdrawn is included in the individual’s taxable income and income tax is payable for the year the withdrawal occurs.
An RRSP does not provide a permanent shelter from taxation, but rather defers income tax payable until a future date. At some point in time monies withdrawn from the plan (either prior to the plan’s maturity, at the plan’s maturity, or possibly upon the plan holder’s death) will be included as taxable income of the plan holder.
First established by Prime Minister Louis St. Laurent’s final government in March of 1957, the RRSP was originally intended to help those Canadians that did not participate in a company-sponsored pension plan to accumulate savings that would support them in their retirement. (At that time, the Canada Pension and Quebec Pension Plans did not exist and those without a company-sponsored pension plan could only look forward to the government Social Security Plan payments in their retirement.)
Initially in 1957, an individual was able to contribute up to $2,500.00 or 10 percent of his/her income each year into an RRSP. The purpose for RRSPs has since expanded beyond simply providing a future source of retirement income to now include the ability to purchase a first home and finance an individual’s education. In addition to this expanded purpose, RRSP rules and guidelines have also evolved to provide greater flexibility around the types of investments that an RRSP can hold, contribution amounts, and maturity options for the plan.
Today RRSPs are one of the most significant pension plans for Canadians. According to Statistics Canada, at the end of 2009, Canadians had $2.1 trillion invested within the three tiers of the pension system – Social Security, employer-based pension plans, and voluntary RRSPs. Of the $2.1 trillion held in the pension system, approximately $750.9 billion is held by RRSPs.
In 2008, approximately 32% of Canadians (or 6 million people) that were employed and filed income tax returns, belonged to an employer-sponsored pension plan and approximately 50% of employed Canadian tax filers maintained and contributed to an RRSP.
The popularity of RRSPs is highest for those tax filers between the ages of 35 and 54 years of age with 63% of these individuals participating. The popularity of RRSP accounts for this age group may be a function of Canada’s aging population where the median age is currently 39.3 years, which compares to 35.2 years of age in 1997.
Note: Any Canadian with eligible, earned income can open a RRSP as long as they are not older than 71 years of age. There is no restriction on the number of RRSPs or accounts that an individual can open and maintain, however, if you have numerous RRSP accounts, they can become burdensome to manage. It should also be noted that RRSPs are governed by the rules and guidelines set out in the Canadian Income Tax Act.
For more information on RRSPs check out the following pages: