RRSP is an abbreviation of the Registered Retirement Savings Plan. In short, it is a great way to save money for your retirement and avoid considerable amounts of taxes in Canada. RRSP has been a retirement account since 1957 and it was introduced by the Canadian government to help Canadians save money for their life after retirement.
RRSPs are accounts with a lot of benefits mainly due to tax reductions and advantages, solemnly created to stimulate people investing in RRSPs, in order to have sufficient funds after their retirement. The simple idea is to save on taxes by committing to a long-term saving plan. The Canada Revenue Agency allows people to not pay taxes immediately and pay them over the next many years (in order to pay less).
Any money contributed to the RRSP will be free of taxes for the same year when the deposit is made. The amount will only be taxed years later when the money is withdrawn. Let’s say you earn $100,000 a year and decide to put the $20,000 to your Registered Retirement Savings Plan. When taxes are due – you will only be accountable to pay taxes for income of up to $80,000 ($100,000 - $20,000), over the same year. Of course, 30 years later when you are retired and decide to withdraw those $20,000 – they will be taxed, but as your income will probably be less, the tax rate will also be less.
An important rule to remember is there is a maximum amount of money allowed to be contributed per year - either 18% of your past year’s income or a maximum amount, whichever’s smaller. For 2019 the RRSP maximum allowed contribution amount was $26,500, while for 2020 the limit is increased to $27,230. The limit does not take into account unused contributions from previous years and goes up over time.
As a conclusion - the Registered Retirement Savings Plan is a great financial instrument to help you accumulate money with delayed taxing, something you should definitely benefit from.