Understanding the tax implications of Registered Retirement Savings Plans

A Registered Retirement Savings Plan (RRSP) is a tax-deductible savings vehicle designed to encourage people to save for their retirement. Contributions are made with pre-tax income, and taxation is deferred to the time when funds are withdrawn, typically in retirement when marginal tax rates are otherwise low, resulting in tax savings over the life cycle. However, RRSP funds do not lock in and there are no early withdrawal penalties by the tax system, which means pre-retirement withdrawals are frequent. This prevalence of pre-retirement RRSP withdrawals raises the question of what reasons, aside from retirement planning, lead people to use these plans. To explore this issue, new research by Statistics Canada and the Retirement and Savings Institute (RSI) at HEC Montréal considers how a person’s financial literacy affects the timing of contributions to and withdrawals from RRSPs.