Registered Retirement Savings Plan (RRSP) is a savings plan to which you can make contributions for retirement that has been registered with the Canadian federal government. When you make a contribution to an RRSP, your money is “tax-advantaged,” which means that you are not required to pay taxes on it in the year you make the contribution.
This is the BIGGEST drawback of RRSPs! If you spend your tax return rather than save it then watch out!
The most efficient way to use an RRSP is to make pre-tax contributions. If contributions are made with post-tax income then you get a tax refund when you file your taxes at the end of the year. This is a huge risk for many people who spend their tax return each year.
You pay tax when you eventually withdraw money from an RRSP so its very important that the tax refund you get today also gets saved. Otherwise you essentially get hit twice, once now when you spend the refund, and once again in the future when you pay tax on withdrawal.
This can cost you $100,000’s!
Using our example from above, spending the tax return will decrease the cumulative RRSP withdrawals by $291,473! Ouch!