Common Misunderstandings About RRSP

RRSP is a very hot topic for investment and retirement planning. It is no doubt a great tool to build up your nested eggs for your retirement. However, there are some common misunderstandings about it. Let’s look at them closely today.

• Have you bought your RRSP for this year? You might have heard about this statement from time to time. A lot of people do not understand that RRSP is NOT a product but rather an account type. You cannnot simply buy RRSP. You buy investment instruments inside your RRSP account. To easily understand this, just think about going to a farm to pick up some berries. At the entrance of the farm, you were given a basket(your RRSP account). Then you are off to the field (the investment market) to pick up some berries(the different types of investments). Whether you are going to pick up strawberry(GICs), blueberry(stocks), or raspberry(mutual fund) or others(other investment types such as ETF, High Interest Savings, etc) is merely your choice.
• RRSP is a tax FREE accout. All money and potential growth of your money are tax FREE. This is NOT correct either. RRSP is a tax DEFERRED account, not tax FREE. Tax deferred simply means that you pay tax later than sooner. When you contribute to your RRSP, the government promises you to tax you later on your contribution. Therefore you receive the tax refund if you have prepaid the tax on your contribution. Let’s say that in 30 years, you need to withdraw your money and any growth of your contribution. At this time, all your withdraw will be taxed at your marginal tax rate at the time of withdraw. So, RRSP is a tax DEFERRED account not tax FREE account.
• You can only take out your money after you turn 69 years old. A lot of my friends do not want to contribute to RRSP because they think they can only take out the money from their RRSP after they turn 69. This is wrong! You can take out your money from your RRSP at ANY time. All the withdraw will be taxed at your marginal tax rate. That is it!
• The contributions have to be deducted at the same year when you make it. Contribution and deduction are different. You do not have to deduct your contribution at the same year when you make it. For example, when you contribute $1000 into your RRSP this year, you can deduct your contribution in 5 years or 10 years or 20 years. The choice is yours.

The above are some common misunderstandings about RRSP. Do you have more to share? Do not hesitate to leave me an comment. Have a great day!