So governments use taxation as a way to promote or inhibit behavior. These retirement tools are designed to encourage people to invest, by providing income tax benefits either right now (RRSP, traditional IRA), or later in time (TFSA, Roth IRA). So not only are you investing for your future, you are also pulling in a tax benefit for yourself. The government benefits, hopefully, by later on having a more independent, financially capable retirement population. Today’s topic: the RRSP. Our American brothers and sisters can keep in mind that the RRSP and the traditional IRA are substantially similar. The RRSP allows you to invest for the future, while claiming a tax deduction this year.
The number one tax shelter in both Canada and the United States is a government-registered savings plan. For Canadians, the Registered Retirement Savings Plan (RRSP), and the Tax Free Savings Plan, are the top tools for investing for the future, while saving income taxes. In the US, this corresponds to the traditional Individual Retirement Plan (IRA) and it’s statutory equivalents, and the Roth IRA. Why do governments set up these kind of plans? People are notorious for not planning for the future. With so many people approaching and entering retirement age, there exists a genuine concern that people will be unable to work, and not have enough funds to support them in what might be a very extended old age.