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Retirement Savings Plan benefits and cautions

Written by Joe Snyder

Friday, February 17th, 2017

Q:

What are the benefits and drawbacks of an RSP?

 

A: Let me start by saying I love RSPs! I think it's a brilliant account type, and can be used very effectively. Retirement Savings Plans (RSPs) have been around since the late 1950s and offer some really attractive immediate and impactful features for investors.

 

The Good:

1) You get a tax deduction for your contributions. This is without question the coolest thing about RSPs. Here's an example of how it works: Your income for the year was $50,000. You made a $5,000 RSP contribution. When you file your taxes, you can claim a deduction for the $5,000 contribution, which will bring your taxable income down by the exact amount of your contribution, to $45,000.

2) You defer paying tax on the growth in your RSPs until you eventually withdraw, down the road. This is also super cool! If you started investing in your RSP in your 20s, and you retire in your 60s, then you've had 40+ years of tax-deferred growth! That's amazing!

3) You can withdraw from your RSPs in certain instances without paying tax. Examples are the Federal Government's Home Buyers' Plan (HBP) and Lifelong Learning Plan (LLP). These tax-free withdrawals can help boost your down payment or fund going back to school. Keep in mind, though, that withdrawals from your RSP outside of the HBP or LLP are taxable.

The Not-So-Good:

1) The growth in your account is only tax-deferred, not tax-free. So while you're benefiting from tax deductions for your contributions now, it's important to remember that when you do start withdrawing the funds in retirement, it will become taxable income, and you'll pay tax on it, though hopefully at a lower tax rate than when you're working and accumulating wealth.

2) The HBP and LLP. I know I put this is the “good" section above, but they are a bit of a double-edged sword. When you withdraw from your RSP for either the HBP or LLP, it's important to remember that there's an opportunity cost attached – you'll miss out on any growth that your investments would have earned. And don't forget that you need to pay these withdrawals back within a set time frame, or the funds will be considered part of your taxable income for the year.

3) Using RSP loans to make contributions. I'm not the biggest fan of these for the same reason as above – creating an additional bill for yourself that you need to pay off within a year or so can be very financially stressful. Don't get me wrong – there are times when it might make a ton of sense to take out an RSP loan, but I think those are the exception, not the rule.

Don't forget - you can check both your RSP and TFSA contribution limits by using the My Account feature on the CRA website. (And because of the handy sign-in partner feature, you can use your online banking login!)

 

If you'd like to submit a question about investing for Joe to answer, you can email it to: askanadvisor@tangerine.ca

This article is intended to provide general information only about RSPs. If you need further information about your specific circumstances you should speak to an investment advisor.

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