When I ask my friends and family members what the interest rate on their RRSPs are, they'll typically quote me whatever the bank has advertised (e.g., 2.1%). The problem with this answer is that RRSPs are not actually an investment you can buy. They don't produce a rate of return or have an interest rate. They are government created tax shelters into which you can place investments.
In the video below, Brad and Andrew from Bumstead Financial Services in Vancouver explain very well what a RRSP is. It's a very important concept, so below the video I will highlight some of the points that I think make the RRSP such a great savings tool but that I also think are misunderstood by most Canadians.
In the video below, Brad and Andrew from Bumstead Financial Services in Vancouver explain very well what a RRSP is. It's a very important concept, so below the video I will highlight some of the points that I think make the RRSP such a great savings tool but that I also think are misunderstood by most Canadians.
Important Points:
1) It costs the Government of Canada BIG money when people can't take care of themselves during retirement. As a result, it started giving Canadians a "tax loan" so that there would be an incentive for them to save some money on their own. When you put money in to a RRSP, the government loans you back the taxes you paid on that money until you take it back out of the RRSP, at which time they tax you at whatever rate you are at that time.
2) My father once purchased a GIC for me. He did not register it in a RRSP. Rather, it was left as an open or "unregistered" investment. Every year I had the GIC, the government would send me a T5 that said how much intrerest my GIC had earned that year. I then had to register that amount on my income tax form and pay the appropriate taxes on the growth of my investment. It wasn't very nice. However, if my father had put it in a registered tax shelter (like a RRSP) the government would not have taxed me on the growth of the GIC while it was in the RRSP.
Furthermore, some mutual funds trigger various additional taxes depending on what happens inside the fund. These are charged to the fundholder (i.e., you), but not if it is in a RRSP. This tax sheltering feature is a major advantage of saving inside a RRSP.
3) When people think their RRSP returns 2.1%, it's not the RRSP that returns 2.1%, it's the GIC or savings account the bank put inside for you so that it could make a lot of money with your money, but tricked you into thinking was actually just what RRSPs make. As Brad explains, you can put almost any kind of investment, including a mortgage, into a RRSP and it will return whatever that investment returns.
1) It costs the Government of Canada BIG money when people can't take care of themselves during retirement. As a result, it started giving Canadians a "tax loan" so that there would be an incentive for them to save some money on their own. When you put money in to a RRSP, the government loans you back the taxes you paid on that money until you take it back out of the RRSP, at which time they tax you at whatever rate you are at that time.
2) My father once purchased a GIC for me. He did not register it in a RRSP. Rather, it was left as an open or "unregistered" investment. Every year I had the GIC, the government would send me a T5 that said how much intrerest my GIC had earned that year. I then had to register that amount on my income tax form and pay the appropriate taxes on the growth of my investment. It wasn't very nice. However, if my father had put it in a registered tax shelter (like a RRSP) the government would not have taxed me on the growth of the GIC while it was in the RRSP.
Furthermore, some mutual funds trigger various additional taxes depending on what happens inside the fund. These are charged to the fundholder (i.e., you), but not if it is in a RRSP. This tax sheltering feature is a major advantage of saving inside a RRSP.
3) When people think their RRSP returns 2.1%, it's not the RRSP that returns 2.1%, it's the GIC or savings account the bank put inside for you so that it could make a lot of money with your money, but tricked you into thinking was actually just what RRSPs make. As Brad explains, you can put almost any kind of investment, including a mortgage, into a RRSP and it will return whatever that investment returns.
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