A contribution paid into a registered retirement savings plan (RRSP) has more of an impact than you think on your tax savings, especially if you have a small family!

In fact, contributing to an RRSP may entitle you to certain benefits and tax credits to which you wouldn't otherwise have access.

A Straightforward Basic Principle

You already know that your annual contribution reduces your taxable income and contributes to your financial security at retirement. You should also know that this reduction in taxable income entitles you to several tax benefits designed to help low- or medium-income families.

Most tax benefits or credits connected with these advantages are given according to the individual's or family's net income. In other words, the calculation that entitles you to these benefits is made after your RRSP contribution is deducted from your income.

This means a certain number of tax measures and advantages, which can vary depending on your province of residence, may be available to you.
Here are some examples:
 

• Certain family programs
• Canada Child Tax Benefit
• Abatement for Quebec residents
• Refundable medical expense benefit
• GST credit
• Credit with respect to age and credit for persons living alone
• Property tax credit
   

As a result, by contributing to an RRSP, not only do you get a tax break, but you also recover a part of the benefits or credits that you would otherwise have lost.

RRSP Withdrawals

The reverse may also occur. If you withdraw funds from your RRSP, you increase your net income. In this case, you might lose your right to certain benefits or tax credits and considerably increase your tax bill.

Although the objective of an RRSP is to provide a comfortable retirement, certain situations may lead to premature withdrawals. It is therefore very important to plan your RRSP withdrawals, since the tax consequences may be significant.