RSP, also known as Registered Retirement Savings Plan, is a specific type of retirement savings account established in Canada. An RSP allows individuals to contribute a portion of their income on a tax-deductible basis, which can then grow tax-free until retirement. The purpose of an RSP is to encourage Canadians to save for their retirement by providing various tax benefits.
Contributions made to an RSP are tax-deductible, meaning they are deducted from the individual's taxable income. This reduces the overall tax liability, allowing individuals to save more for retirement. However, there are limits to the amount that can be contributed annually, based on the individual's income. Any growth or income generated within the RSP remains tax-free until it is withdrawn during retirement.
RSPs serve as long-term retirement savings vehicles, and individuals can invest their contributions in a variety of financial instruments such as stocks, bonds, mutual funds, or high-interest savings accounts. These investments aim to generate returns over time, increasing the value of the RSP.
When funds are withdrawn from an RSP, typically after the age of 71, they are subject to taxation as regular income. However, during retirement, individuals may have a lower tax rate, thus potentially paying less tax on their withdrawals.
Overall, RSPs play a crucial role in helping Canadians save for retirement by providing tax advantages, allowing for long-term investment growth, and ensuring a stable source of income during post-employment years.
