The money you contribute to your RRSP is deductible from taxable income
The money you contribute to your RRSP is deducted from your income in the year contribution was made to your plan. Let’s say in 2021 you earn $50,000 and contribute $4,000 to your RRSP, this $4,000 will be reduced from your annual earnings and income tax will be calculated as though you earned $46,000.
The money in your RRSP grows tax-free
Any profits earned on investments inside your RRSP are not taxed until the plan is closed and you start withdrawing money from the plan. All funds withdrawn from the plan will be added to your earnings in the year the withdrawal was made and income tax will be calculated on total earnings including funds withdrawn from your RRSP.
In order to contribute to an RRSP, you need to have earned income (such as from employment or pension). The limit is 18% of your earned income in the preceding year up to a maximum of $26,230 (for 2018). Any unused room (if you contribute less than your maximum) will be carried forward till you reach age 71. Your Notice of Assessment will have your total contribution room or you can find it using your CRA My Account.
The deadline for 2021 contributions will be March 1, 2022, or December 31, 2021 if you turn 71 in 2021.
Kinds of investments held in an RRSP
You can invest in anything you like from low-risk GIC & bonds to higher-risk investments like stocks (both Canadian & foreign).
Where to open an RRSP account
You can open your RRSP with banks, trust companies, credit unions, mutual fund companies, investment firms, and life insurance companies.
This post originally appeared on MMS Accounting’s blog: https://www.mmsaccounting.ca/post/how-much-should-you-contribute-to-your-rrsp
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