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RSPs and taxes: What you need to know

There’s a secret side to your RSP, and it involves taxes. If you’re already investing in a registered savings plan, then you know the investment account is designed to help you save for your “golden” (retirement) years. But what you might not know is that by saving your pennies for your non-working days now, you’ll also benefit from some immediate tax breaks. Here’s everything you need to know about RSPs and taxes.

couple discussing taxes

How RSPs impact your current tax rate

According to TD Canada Trust, RSPs are government-regulated accounts that come with a healthy side of tax break. “Your annual RSP contribution can reduce the amount of income tax you pay in that year, and the money you put away can have years of tax-deferred growth potential. You only pay tax on the amounts you withdraw.” In layperson’s terms, that means investing in an RSP is a win-win: You’ll be saving for your retirement and spending less of your income on taxes each year.

Is there a maximum tax-deductible RSP contribution?

Because you’ll receive a tax break by investing in an RSP, there is a limit to how much you can save. Each year the Canada Revenue Agency (CRA) will send you a “notice of assessment” with your tax return. On that form, the CRA gives you a “maximum” amount of dollars you can put into an RSP each year. If you go over this limit, you will be penalized. To learn about the specifics, speak with a financial advisor or visit the CRA’s website.

What happens if you want to withdraw money from your RSP?

If you choose to withdraw money from an RSP to make a big purchase or to pay off debt, for example, you can do so, but you will be taxed on the transaction. Withdrawals from these accounts are considered income and therefore taxed at a marginal rate (given your current salary).

Does it matter when you contribute to your RSP?

Yes, it does. The tax break you receive by contributing to an RSP can be carried forward. For example, if you know you’re about to receive a substantial raise that will bump your income into a higher tax bracket, you can hold off on claiming your “RSP contribution tax deduction” until a future year. Doing so will offset the tax increase you face and the money you lose because of your increased income. Learn more about saving for retirement by checking out the TD retirement savings calculator.

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