The RRSP (Registered Retirement Savings Plan) is not my first choice of CRA (Canada Revenue Agency) registered plans to use in my investment strategy. However, it is a very useful tool. Unlike the TFSA (Tax-Free Savings Account), the RRSP is not a tax-free plan. Its purpose is tax deferral.
The RRSP is all about tax deferral
When you contribute to the RRSP, you can deduct your contribution amount from the income you earned in that year. If you had some big gains from investments or a large bonus, you can use RRSP contributions to reduce your income to a lower tax bracket.
Contributing is a great way to immediately lower your tax bill in a given year. If your contributions are large enough, you might even be able to earn a cash tax refund.
Once you have made contributions, any investment inside the RRSP can compound tax-free. Capital gains, interest, or dividends will not be taxed inside the RRSP. However, you need to be careful…
