Registered Retirement Savings Programs (RRSPs) are an excellent way to save for retirement and save on taxes. The benefits are that one can save for retirement in a tax-efficient way, and get an immediate tax deduction. A drawback is that RRSP money becomes taxed as income when it is withdrawn.
First, RRSPs offer a tax deduction. Looking at the 2015 federal tax rates, there are four marginal tax rates. Someone making between about $43,000 and $87,000 is most common. At the federal level, every extra dollar that person makes is taxed at 22% (more provincially). RRSPs, as a deduction, reduce taxable income. If that person puts $5,000 into an RRSP, the tax refund will be $5,000 x 22% = $1,100.
Next, funds in RRSPs grow tax-free. Assuming decent investments are made, RRSPs can build a nest egg for retirement. This is great as interest income won’t be taxed at the 22% mentioned above, or capital gains at half that rate. A small downside is that interest borrowed to put into RRSPs is not tax-deductible. Dividend tax credits cannot be used, but this is often small in comparison to the tax deduction and tax-free growth.
Finally, RRSPs are a source of income-splitting. A spouse may put money into a spousal RRSP for the spouse to depend on upon retirement.
The RSP deadline for the 2015 tax year is Feb 29,2016. The deadline is sixty days into the year for every year.