RRSPs

The Registered Retirement Savings Plan is the well-known Canadian investment vehicle that holds your money tax-free until you withdraw it, usually at retirement although you can withdraw money at any time except for locked-in plans. An RRSP can hold mutual funds, GICs, stocks and other financial instruments.

Although you can get taxed on money you pull out of an RRSP, it's important to remember that a dollar today will be worth more than a dollar when you retire because of inflation and overall cost-of-living increases that can even be higher than inflation. That's why it can be beneficial to defer taxes as much as possible and invest the money in a registered plan.

You can choose from basic RRSP investments like mutual funds, GICs and Canada Savings Bonds. These are handled by a portfolio manager. You also elect to choose a self-directed RRSP, where the investor assumes responsibility for the performance of the investments. These RRSPs can include things like public company shares, mutual funds and mortgages.

Tax deferment is the big advantage of a registered plan like an RRSP over a non-registered plan. However, non-registered plans can give you a wider range of investment options and they don't have the dollar restrictions that RRSPs do. RRSPs limit how much you can contribute in any given year.

RRSPs also offer options that let you use a significant amount of RRSP money without paying taxes. These include things like the Home Buyers Plan, where you can withdraw up to $20,000 tax-free to buy a home if you are a first-time buyer. Another withdrawal option is Lifelong Learning Plan, where you can take out up to $20,000 to finance training or education for you or your spouse or common-law partner.

There also are a number of options for you to transfer money tax-free out of an RRSP into plans that can provide you with a steady stream of income.

Spousal RRSPs

This is an RRSP set up for the benefit of your spouse or common-law partner, where you make the contributions and your household can get additional tax deductions.

This type of RRSP lets you take advantage of income splitting. If your spouse has a lower income than you that means your spouse likely is in a lower income tax bracket. This means that the income he or she eventually draws from the RRSP would get taxed at the spouse's lower tax rate.

Like a regular RRSP, a spousal plan can be basic or self-directed, and can hold various kinds of investments depending on the type of RRSP. The spouse must 69 years of age or younger, while the contributor can be any age.