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Understanding the R.R.S.P

understanding rrsp

For a lot of people it is really difficult to give much thought to any type of savings plan because it is all they can do to make ends meet now.   Often this means not paying attention to the registered retirement savings plan in respect to the deadline date for contributions, or even to how much they would be allowed to contribute.

It isn’t unusual for some individuals to think that because they have missed the deadline that they have missed their opportunity for the applicable tax year.   While this is true it doesn’t mean they have missed the amount they can contribute, as it can be carried forward for the next year or future years.   Even if you are not able to take advantage of this type of savings now pay attention to your contribution levels so if the money situation becomes better for you in the future it is a savings option available to you.

Another common mistake is that some people view the RRSP as a tax exemption.   This is because they don’t have to pay taxes on the amount that is being put into the pension.   It is a tax deferment.   It provides a great tax advantage for the person who is in a high tax bracket now.   In any event when you start withdrawing money from this plan it will be taxable, but the advantage may be that you will be in a lower tax bracket so the amount of tax to be paid will be lower.

Those who really focus on being financially secure believe that the best decision is to contribute the maximum amount that they are allowed to towards their R.R.S.P each and every year.   There could be a danger to doing this if the amount is high as it could create an Old Age Security benefit claw back, although income splitting could offset this.

For those who put money into their RRSP and forget about it they may not realize if they really need to access the money they can, unless it is a locked in RRSP which has different rules.   The government has allowed some use of the RRSP on a temporary basis without hitting the tax payer with tax.   Before deciding to do this it is well worth weighing out the benefits vs. the possible consequences.

Everyone really needs to consider their financial security for when they become seniors.   All too often there is the perception that they will have their old age pension and perhaps the Canada Pension and that will be plenty to live on.   This is not a good way of thinking, and the best people to listen to for advice about this time of life when it comes to money, is the seniors of today.   They are the ones that can tell you first hand, that you would be wise to think about your finances beyond what you are going to get from the government.

 

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Sam Seidman, CPA, CA, LPA
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