It is that time of year again. We are bombarded by the media and your financial institution to purchase an RRSP. Though we are becoming more educated because of this constant exposure I am still often confronted with the misconception that it is an investment.

A Registered retirement savings plans is a vehicle created by the government to entice us to save for our own retirement so that they don’t have to support us. You can make a variety of investment choices in your registered plan, whether term deposits, mutual funds, equity or income based investments, etc. It is our choice how we wish to invest our funds in our own Registered Retirement Plan and how much risk we are prepared to take.

They make it attractive by allowing us to deduct contributions against our earned income so that we can get a refund or to reduce the tax payable in that year. We are not actually saving tax as deferring it to a later date, ideally in retirement, when we are withdrawing it. The tax saving is that at retirement we will be in a lower tax bracket than when we were working, and that may create some tax savings. That is great in theory, but depends on many factors such as in 20 or 30 years how badly the government needs our money.

The other even more significant advantage of RRSP’s is the fact that the growth within the plan is tax sheltered until withdrawn. The power of compounding is: making your money work harder by deferring your tax payments until you withdraw it from the plan. For example for every $1 you earn in a non-registered term deposit (and you are in a 37% tax bracket) only 63 cents stay in your pocket to reinvest, while in the registered plan that entire $1 continues to work for you. This compounding factor is the real benefit of a registered plan. Reinvesting those tax deferred payments will exponentially increase the growth of your portfolio over time.

That is why that unused contribution room that shows up on your Notice of Assessment each year is a potential valuable asset that, when used, can help you save on income taxes while growing your retirement savings. It could be easier than you think to find the money to utilize this potential to make those dreams at retirement a reality.

Mutual funds are offered through Credential Asset Management Inc. Unless otherwise stated, mutual fund securities and cash balances are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer that insures deposits in credit unions. ®Credential is a registered mark owned by Credential Financial Inc. and is used under licence.

January 22, 2010