Have you ever been at some type of gathering and heard people discuss RRSPs?\n\n\n\nWere you thinking \u201cwhat is an RRSP\u201d while praying nobody asked you to contribute to the conversation? Yeah, me too.\n\n\n\nThis article will go more in depth into what is an RRSP, what is the RRSP deduction limit and what is the RRSP contribution limit.\n\n\n\nFinancial acronyms such as \u201cRRSP\u201d are too often thrown around in conversation with the misconception that everybody understands what they are and what it stands for.\n\n\n\nIn short, RRSP stands for\u00a0Registered Retirement Savings Plan.\u00a0\n\n\n\nOpen up an RRSP Today with Wealthsimple! ($25 Bonus with Sign-up)\n\n\n\nOpen up a RRSP with Wealthsimple Invest Today ($25)Earn a $25 Bonus with Sign - UpRRSP contributions are tax deductibleVery simple sign-up processNo account minimumAccount creation is 100% freeModern user interfaceOpen a RRSP Today\n\n\n\nWhat is an RRSP?\n\n\n\nThink of an RRSP as a special type of savings account that is primarily used for your retirement savings.\n\n\n\nA common question people ask is \u201c what is an RRSP and how can I invest in one?\u201d\n\n\n\nBut here\u2019s the thing\u2026\n\n\n\nAn RRSP in itself is not an investment, but it is a vehicle in which you can hold your investments to get special tax advantages to save for retirement.\n\n\n\n\n\nWhat Tax Advantages does an RRSP offer?\n\n\n\nReduces Your Taxable Income\n\n\n\nWhile there is a specific limit to how much you contribute to your RRSP (which we will discuss later), contributing to your RRSP directly reduces your taxable income.\n\n\n\nFor example, let\u2019s say you make $65,000 a year, by contributing $10,000 to your RRSP your new taxable income is only $55,000 as opposed to $65,000.\n\n\n\nIn other words, the government will tax you as if your income was $55,000 as opposed to $65,000, lowering your tax burden.\n\n\n\nNot only does making RRSP contributions set you up for retirement nicely, but by regularly contributing to your RRSP, you will often overpay in taxes each year and in return receive a generous tax return come tax season.\n\n\n\nInvestments Grow Tax-Free\n\n\n\nIf you make investments outside of a registered savings account such as an RRSP, TFSA or RESP, all income generated from these investments are taxable.\n\n\n\nHowever, as long as you keep your money within your RRSP, all of your investments will grow tax free and they are 100% protected from government taxation until you withdraw it.\n\n\n\nWhile you can withdraw money from your RRSP before you turn 65, I would not suggest it. Not only does withdrawing from your RRSP come with a heavy tax burden, but your money won\u2019t grow as fast in the future as there is less money for compound interest.\n\n\n\nFor more benefits of the RRSP check out my article, Top 9 Benefits of Investing in an RRSP.\n\n\n\nCommon RRSP Investments\n\n\n\nAs mentioned earlier, RRSPs are similar to bank accounts as they help you store money, however they differ in the sense that you can make investments within your RRSP accounts unlike in your standard cheqeuing or savings account.\n\n\n\nHere are some of the most common investments people make within their RRSP account:\n\n\n\nIndex Funds (ETFs)Mutual FundsIndividual StocksBondsGICsGoldCash\n\n\n\nWhat is the RRSP Contribution Limit?\n\n\n\nYour RRSP contribution limit simply refers to the amount of money you can put into your RRSP each year.\n\n\n\nAs of 2020, you can contribute a maximum of 18% of your income from the previous year plus any unused contribution room from years past.\n\n\n\nFor example, your RRSP contribution limit for the 2020 tax year would be 18% of your 2019 earned income plus any unused contribution room from previous years.\n\n\n\nThere is also a limit to how much one\u2019s RRSP contribution is. Regardless of how much you make, the federal government puts a maximum amount on how much you can contribute to your RRSP for each year. The maximum contribution limit was $26,500 for 2019 and $27,230 for 2020.\n\n\n\nOpen up a RRSP with Wealthsimple Invest Today ($25)Earn a $25 Bonus with Sign - UpRRSP contributions are tax deductibleVery simple sign-up processNo account minimumAccount creation is 100% freeModern user interfaceOpen a RRSP Today\n\n\n\nThis prevents high income earners being able to donate hundreds of thousands of dollars each year to avoid high tax brackets.\n\n\n\nYour total RRSP contribution amount may also be lowered if you have an employer sponsored pension, but we will discuss those details in another article, for now, just remember your RRSP contribution limit is either 18% of your income, or roughly $27,000, whatever is lower.\n\n\n\nLastly, it is important to note you can contribute to your RRSP upto and including 60 days in the next year. For example, the last day Canadian residents could contribute to their RRSPs was March 2nd, 2020 for the 2019 calendar year.\n\n\n\nWhat is the RRSP Deduction Limit?\n\n\n\nPeople often confuse the RRSP deduction limit with the RRSP contribution limit. Typically, these amounts will be the same however they have slightly different meanings.\n\n\n\nYour RRSP deduction limit refers to how much you can deduct from your taxable income for a given year while your RRSP contribution limit refers to how much you can put away in your RRSP each year.\n\n\n\nRelated Financial Geek Article: Retire Early as a Canadian | 15 Tips and Tricks\n\n\n\nConclusion\n\n\n\nWhile there are a few more things we could discuss about RRSPs, the purpose of this article is to give you a high level overview of RRSPs.\n\n\n\nThe bottom line is, if you are Canadian who earns an income, you should open up an RRSP if you haven\u2019t already.\n\n\n\nIf you are in fact interested in opening up an RRSP for yourself, I'd recommend doing so with Wealthsimple for the 10 reasons I talk about in my article here.\n\n\n\nIf wanted to get started right away, sign-up for one here and get $25 bonus for doing so.\n\n\n\nThink of an RRSP as a gift from the federal government \u2013 these rarely come along so take advantage when they do!\n\n\n\nGeek, out.