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The Registered Retirement Savings Plan, abbreviated to RRSP, is by far the most common retirement savings account in Canada.

The Registered Retirement Savings Plan is a long term savings vehicle, whose main purpose is to enable the pensioner to be able to buy an annuity at the end of the term. However there are a couple of areas where the saver is allowed to withdraw funds, to help with the purchase of a first home or to pay for a degree level further education course. It was introduced in 1957.

The Registered Retirement Savings Plan status as a long term savings vehicle means that most savers place their scheme money in the stock market, where values are more volatile in the short run but over the long run tend to outperform most other forms of investment. This is not a requirement as safer but slower growing investments such as guaranteed investment certificates and savings accounts can be used, and this is usual when the investor approaches retirement. Usually accounts should be set up with an adviser, and in many cases it is not be possible to set up an account without an adviser.

There are three ways that the Registered Retirement Savings Plans can reduce taxes:

• Contributions to Registered Retirement Savings Plans are deducted from income before calculating income tax due. Essentially they are untaxed. There are limits on how this can be done.
• Income and capital gains within a Registered Retirement Savings Plans is not taxed while the money is still in the plan
• Income is often taxed when a taxpayer is retired and on a lower income, so tax is paid at a lower rate than when it is earned.

A Registered Retirement Savings Plan is set up either as an individual, a spousal RRSP or a group plan – which are often used by employers. There are a number of different accounts available, which can restrict the investments you’re allowed. The four structures are client held accounts, nominee accounts, self directed and intermediary accounts.

Nominee Accounts - In this account an institution is named nominee and it then holds the investments in the clients’ name and interest. Different investments can be held in the same account. Usually a nominee is a big investment dealer or one of the big five banks and they usually will attract an annual fee.

Intermediary accounts - Intermediary accounts are similar to nominee accounts, but is offered by a smaller adviser unable to deal with the administrative burden of nominee accounts.

Client name accounts - Client name accounts, which are also known as client-held accounts, are financial products sold to individuals. A number of these can be held by an individual within a year, and if there are separate providers this will result in separate accounts. There do not tend to be any annual fees, and the responsibility is on the individual to track each Registered Retirement Savings Plan investment.

Self Directed - Self-directed Registered Retirement Savings Plan (SDRSP) are nominee accounts but with a greater degree of investment freedom. They acts as a “wrapper” in that although held as a nominee account, the institution buys and sells stocks on the instruction of the investor, in the same way as a normal share dealing account would operate.

Deduction limits

The deduction limit usually is 18% of last tax year’s earned income, although there is a contribution cap for high earners which in 2009 was $21,000, in 2010 will be $22,000 and after 2010 will be linked to average wages. Tax contributions not paid carry forward without any time limit. Permitted deduction limits are notified annually by the Canada Revenue Agency.

A Registered Retirement Savings Plan ends at the age of 71. Then contributions have to stop. The plan must either be cashed out or matured into a Registered Retirement Income Fund, which is a tax free scheme with a minimum annual withdrawal.

Eligible Investments

Registered Retirement has a wide range of permitted investments, including:

Canadian Dollar savings accounts
• Publicly traded stocks on most large exchanges
Real estate investment trusts
• Foreign Exchange
• Mutual funds
• Annuity contracts
• Certain types of private shares
• Some derivatives
• Royalty and partnership units
• Guaranteed Investment Certificates (GICs)
• Bonds
• Depository receipts and a limited amount of debt obligations