As your income increases so does the amount of tax you need to pay. Your tax bill may be very high, so Registered Retirement Savings Plans (RRSPs) are a great way to save money towards your retirement and reduce your taxes. For most Canadians, this is one of the most efficient ways of creating a retirement fund.

RRSPs may not be equally effective solution for all type of business owners, depending upon the nature of business and its financial health, however, a basic know how of RRSPs can help you make better financial decisions for yourself as well as your business.

Here are 6 things you should know about RRSPs.

1- Your interest grows tax free

Everyone knows the money you contribute towards your RRSP can generate a tax deduction. But, did you know that it grows tax-free within the plan as well? If you keep your RRSP intact until the end of the year you turn 71, you will have gathered a sizable amount of interest without having had to pay any taxes on its growth within the plan. You will be taxed when you withdraw money from this account. However, by then you will likely be in a lower tax bracket and hence will pay a lower tax.

2- You can plan your contributions to suit yourself

Every year, the government sets a maximum amount of money you can contribute towards your RRSP. This amounts to 18% of your earned income minus any pension adjustment. However, if you cannot pay the entire amount, the balance can be carried over each year until the year you turn 71. Thus, if you find it difficult to save in your twenties, you can make up for it by contributing more at a later age.

3- You have plenty of choices

You can invest your money in a number of different ways in an RRSP account. Some financial institutions also allow you to have a diverse portfolio. This allows you to be flexible with your investment choices.

4- You can contribute to your spouse’s RRSP

When it comes to most couples, one person earns more than the other does. Thus, has a different RRSP contribution limit. It is therefore possible that, if your spouse has already contributed their full amount to their RRSP, you could contribute to a spousal RRSP. This does not affect their contribution limits, though it does reduce your contribution room.

5- You can choose your mode of payment

Contributions to an RRSP can be made anytime throughout the year. Most people choose to contribute to their RRSP on a monthly basis. To make it easier, you can ask your bank to transfer money into your RRSP monthly.

6- You can take a loan to pay your RRSP contribution

There may be many situations when you cannot contribute money to your RRSP account. In such cases, it may make sense to take a loan for the same. This allows you to build your RRSP fund at a faster rate. You can then use your tax refunds to partially pay back the loan. Check out this RRSP loan calculator to get a clearer idea.

The Bottom Line:

If you’re a small business owner, you have two main options for deferring taxes while reinvesting your business profits. You can either reinvest the excess funds in your business to expand operations or you can withdraw funds and invest in a Registered Retirement Savings Plan (RRSP). Not for all, but for many business owners, withdrawing excess funds and investing in an RRSP may be the better choice.

This post contains sponsored links from Sun Life Financial.