A Registered Retirement Savings Plan or RRSP is a type of Canadian account for holding savings and investment assets
RRSPs have five effects:
Taxes on earned (employment) income (to the extent contributed to the plan) are deferred until the eventual withdrawals from the plan. There is no benefit from the deferral because it is an accrued liability that grows at the same rate as the investments themselves. The tax deferred is commonly called the contribution tax credit.
Income earned inside the plan on the after-tax savings (excluding the contribution tax credit) is not taxed either while within the plan or on withdrawal. Asset classes that attract the highest taxes (%income * %tax rate) are best kept within the plan to maximize the deferral benefit.
One's marginal tax rate when withdrawing cash may be higher (or lower) than the rate at which one claimed the original contribution credit. This creates a penalty (or benefit) equal to (change in tax rate %) divided by (1 minus tax rate on contribution).
Canada has a variety of programs available to retired people whose benefits decrease as one's income increases. By deferring the income until retirement, the additional income created at that time may reduce those benefits.
Claiming the contribution tax credit may be deferred until a later year (when the expected marginal tax rate is higher), but there is an opportunity cost penalty for the delay; the potential income the tax credit could have earned during the delay.
A Registered Education Savings Plan, or RESP, is an investment vehicle used by parents to save for their children's post-secondary education in Canada. The principal advantages of RESPs are the access to the Canada Education Savings Grant (CESG) and a source of tax-deferred income. An RESP is a tax shelter, designed to benefit post-secondary students. With an RESP, contributions (comprising the investment's principal) are, or have already been, taxed at the contributor's tax rate, while the investment growth (and CESG) is taxed on withdrawal at the recipient's tax rate. An RESP recipient is typically a post-secondary student; these individuals generally pay little or no federal income tax, owing to tuition and education tax credits. Thus, with the tax-free principal contribution available for withdrawal, CESG, and nearly-tax-free interest, the student will have a good source of income to fund his or her post-secondary education.
Our #1 priority is you! Connect with a Falcon Portfolio finacial expert today for a no charge consultation.