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RRSPs your Key Investments


RRSPs are the best single investment any Canadian can make." That's a statement heard over and over again from financial advisors. A registered retirement savings plan should be the cornerstone, the major building block, to help ensure your retirement income.

Retirement saving is essential

If you are a member of a company pension plan, an RRSP should be used as a supplementary investment. If you are not, an RRSP is a must.

The major reason to contribute to an RRSP is to provide retirement income. An added value is the deferral of tax on both the funds contributed to the plan and the investment income earned in the plan. You deduct the money you place in an RRSP from your earned income, reducing your current tax burden. The funds will be taxed when you withdraw them, which is usually after retirement. At that time, both your income and your tax bracket may be lower.

How much to contribute

In any year, you can contribute 18 per cent of your previous year's "earned income" to an RRSP. Earned income is your salary or business income for most people. However, it can also include research grants, royalties, taxable alimony and child support, rental income, CPP/QPP disability income and other amounts. The maximum contribution is:


2006 $18,000
2007 $19,000
2008 $20,000
2009 $21,000
2010 $22,000
2011 and following years, indexed to increases in the average wage.

A company pension will affect your maximum allowed contribution. You must deduct your “pension adjustment” from your RRSP room to account for the pension. Your employer will report this amount to you. The Canada Revenue Agency tracks your RRSP deduction limit for the current year. You will find it on the notice of assessment issued for your previous year's tax return.

When to contribute

You have until 60 days after the end of the year to contribute to an RRSP for that year. This means the busiest time for buying RRSP investments is in the last two weeks of February. But that's not the best time. It's far better to contribute regularly throughout the year. It's easier to save a little at a time than a large lump sum.

If you don't make your maximum allowed contribution, you can make up the difference in future years. You can carry forward your unused contribution room indefinitely, but most Canadians have such a large shortfall they will never make it up. And remember, the longer your money is in the plan, the larger it grows.

Many investment options

RRSPs may seem straightforward, but they can be complicated by the many ways to invest. These include segregated funds, mutual funds, guaranteed investment certificates (GICs), fixed-income securities, Canada Savings Bonds, qualified mortgages and cash. Since January 1, 2005, you are allowed for foreign property in RRSPs or RRIFs with no limit. This allows more international diversification opportunities for retirement investments.

Making the best use of an RRSP involves tax, retirement and investment planning. Your financial advisor can help you make the right decisions.