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What are the advantages of investing for retirement through a Registered Retirement Savings Plan?

When you put eligible investments in your RRSP such as: stocks, bonds, GICs and mutual funds, you are entitled to a couple of tax advantages.

First, Canada Customs and Revenue Agency (CCRA) gives you a tax deduction on contributions made to your RRSP, so you save tax dollars today by reducing your taxable income.

The other big advantage is your investments inside the RRSP grow tax-defered: they are not taxed until you start withdrawing the money. That means the power of compounding lets your nest egg grow faster than it would if it were outside the RRSP where it would be subject to tax each year.

You would get the greatest tax advantage if you put the money into the plan when you were in a high tax bracket, and, in retirement, took it out (as income) when you were in a lower tax bracket.

But if your tax-sheltered savings have grown into the hundreds of thousands of dollars, you could end up with an income that's large enough to bump you into a higher tax bracket. In that case, you may find you're paying more in tax than you had saved, years before, by getting that tax deduction.


For every $1 you put into the plan in your working years, you saved 50 cents in income tax, assuming you were in the 50 per cent tax bracket. You would have deducted that $1 from your taxable income, avoiding paying tax on that amount. If your income in retirement is less than it was during your working years, you might be say in the 40 per cent tax bracket. So for each $1 you take out as income, you have to pay the government 40 cents. That's in contrast to the 50 cents you saved when you put that dollar into your plan.

Another example:

If you were instead in the 40 per cent tax bracket when you made that $1 contribution to your RRSP, you would have saved 40 cents in tax. Let's say when you retire, income from your RRSP and other sources is enough to bump you into the 50 per cent tax bracket, assuming you withdraw it from your RRSP. In that case, you will be paying 50 cents in tax, compared to the 40 cents of tax you saved years earlier when you made the contribution. So you would end up paying more tax than if your circumstances matched our first example.

In both cases, though, if you didn't put that $1 into the RRSP, you would have lost out on it's tax-sheltered growth over the years. That dollar may have grown into many dollars.

There's a tax wrinkle with RRSPs you should be aware of. When you start drawing income out of your RRSP or RRIF, all of that is taxed at your full regular tax rate, the same as interest income. That's the case even if your investments generated capital gains or were dividends from Canadian corporations.

But if you have investments outside your RRSP which generate capital gains or pay dividends from Canadian corporations, they would generally be eligible for special tax treatment.

So to minimize your taxes, once you have put your limit in your RRSP each year, you might consider investing outside your RRSP in stocks or mutual funds which invest in stocks. That way, you would be able to take advantage of the tax breaks for that kind of income.

Before making investment decisions, consider getting professional advice. An investment or strategy which may make sense for one person may not suit your circumstances.