What is an RRSP?

It’s time to think about your investments. As we head towards tax season and the yearly cut off for your RRSP contribution – we are talking about the ins and outs of this investment and savings tool.

We sat down with Scotiabank senior financial advisor Daniel Grosberg to ask him some common questions around this investment option.

Check out what he had to say.

The RRSP is a great savings account for long-term savings, especially for retirement. But it also has short-term benefits, especially Home Buyers Plan, where first-time homebuyers can do a withdrawal up to $35,000. 

All the investments in the account, such as GICs or mutual funds, aren’t taxable. However, the only tax you would pay is if you are to do a withdrawal from the account, which would be taxable as income.

Some of the mistakes people make are that they use the RRSP for short-term savings. If you have, say, a vacation or a high credit card bill that you want to pay, the RRSP is really the last resort you want to take money out from. We always recommend that you have an emergency savings account, after that you could take money out from your TFSA – the RRSP should be the last resort.

A lot of people make that mistake, where they make contributions to the account and they just leave it. They think an RRSP is just a savings account and they will make money off of that. Unfortunately, it’s not going to do anything for you, nor will you take advantage of the tax sheltering benefits that way.

We always recommend if you are investing for longer-term, whether it is within your risk tolerance to go into some mutual funds and get a diversified investment over the long-term or if you are looking into something more short-term like buying your first home – GICs are a great option.

It’s a great idea to first check how much contribution room you have because you would be penalized for any over-contributions. How you get contribution room is off of your income – is by either taking the lesser of 18% or around $27,000. The maximum cap is increased every year.

Editor's note: You can contribute up to 18% of your previous year’s earned income up to a maximum of $27,830 for 2021, plus any unused contribution room from previous years.

Within a TFSA and an RRSP, think of it as an umbrella and within the account you can have multiple investments – savings, GICs, mutual funds. It’s all dependent on when you want to use the money, how long you are saving it for and what your risk tolerance is.

Well that depends – if you are a first-time homebuyer, I definitely recommend saving in both. 

With RRSPs – for the first $35,000, you are eligible to do a withdrawal under the Home Buyers Plan (for your first home purchase). You can take out the $35,000. You then have to repay it over 15 years, starting two years after the year you did the withdrawal.