RRSP

How many times have you heard someone say “I invested in an RRSP!” After all these years of explaining what an RRSP is, how it works, and why you should have one, many people still don't get it.

It isn't really the public's fault. It's the fault of the media and of financial institutions, which continue to encourage people to "invest" in RRSPs. Well you can't. RRSPs don't have a return. The underlying investments do, but many people don't understand how those work either. An RRSP is like a Container or Box that protects the contents, your money, while is in there from one (1) bad thing; the erosion of its total caused by taxes. 

Okay, here I go, one more time. I'm going to simplify this as much as I can. Go get yourself two things before we start: you'll need a box of some kind and an umbrella. Got 'em? Okay, here we go.

Take a $20 bill out of your wallet and stick it in the box. That's what you do when you put your money in a savings account. Now slide the box under the opened umbrella. That's what you do when you put your money in an RRSP. The savings account is the investment. The RRSP is the plan registration. You could just have easily put your money in a shoe - a term deposit, a plastic bag - a mutual fund, or a envelope - a stock or bond. The investment is where you put the money to work. The RRSP is the umbrella that let's you grow that money on a tax-deferred basis.

Now, stay with me. Slide the box out from under the RRSP. That's what happens when you deregister your money from RRSPs.

The RRSP simply protects your money from tax, like the umbrella protects you from rain. Step out from under the umbrella and you'll get wet. Take your money out from under the RRSP registration and you'll pay tax.

The money that goes under the RRSP umbrella isn't taxed in any way, so if you have paid tax on that money through your payroll deductions at work, the tax man will give your that tax money back. Which is why some people get a tax refund when they contribute to an RRSP. Since nothing under the umbrella is taxed, the income you earn is earned tax-free too. Which is one reason why any money under the RRSP umbrella grows so much more than it can outside of an RRSP.

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