Registered Retirement Savings Plan

A Registered Retirement Savings Plan (RRSP) is a retirement plan that you establish, and to which you or your spouse or common-law partner contribute. The plan is Registered in the Canada Revenue Agency under the Income Tax Act and regulated by the Federal Government.

Contributions to the plan are tax-deductible unless they exceed RRSP deduction limit. Your 2010 RRSP deduction limit is shown on the latest Notice of Assessment or Notice of Reassessment, which was sent you after Canada Revenue Agency processed your 2009 return.

The maximum RRSP deduction limit for 2010 is $22,000. However, if you did not use all of your RRSP deduction limit for the years 1991 to 2009, you could carry forward the amount you did not use to 2010. Therefore, your RRSP deduction limit for 2010 might be more than $22,000. If you are a member of a Registered Pension Plan (RPP)  or Deferred Profit Sharing Plan (DPSP), your annual RRSP deduction limit is reduced by the pension adjustment, which depends on the amount the employer contributes in the plan. And again, the amount of RRSP contributions that you can deduct for 2010 appeared on your  Notice of Assessment or Notice of Reassessment for 2009.

These contributions are invested in different investment products. Contact us for information and free consultation regarding how you can invest your money in RRSP.

Any income you earn in the RRSP is usually exempt from tax for the period the funds remain in the plan. It means you can earn more. For example, you pay 30% income tax. If you invest your funds in some financial vehicle in RRSP, which pays 5% interest, the gross value of your investments in 10 years will increase by 63% (the compound value). If you invest in the same financial vehicle with the same interest rate out of RRSP, the effective interest rate in this case is 3,5% as you pay tax on the interest every year. That is why your funds in 10 years will increase by only 41%.

An RRSP is an account designed to benefit the owner at retirement. The investor pays tax when he or she receives payments from the Plan. It is supposed, while the RRSP income is taxed in full, the investor may be subject to a lower tax rate if he or she has retired and is receiving a lower taxable income (see Illustration).

An RRSP holder may make withdrawals or de-register the plan at any time (except lock-in RRSPs). But withdrawals from an RRSP and de-registered amounts are subject to a graduated withholding tax and such withdrawals must be included in income in the year withdrawn. The withholding tax paid by the RRSP holder should be taken into account when his/her annual tax return is calculated, and more tax may be payable at year-end, depending on the RRSP holder's income level.

There is no limit to the number of RRSPs an individual may own.

An RRSP cannot be as collateral for loan purposes.

You can withdraw from RRSPs to buy or build a home for yourself or for someone who is related to you and is disabled (Home Buyer's Plan). And you can withdraw from RRSPs to finance training or education for you or your spouse or common-law partner (Lifelong Learning Plan). You do not have to include eligible withdrawals in your income and pay withhold tax, when you withdraw funds from your RRSP in these cases. However, you have to repay the amounts over definite period of time.

You may want to set up a spousal or common-law partner RRSP (Spousal RRSP). By doing so, the taxpayer can create an RRSP in the spouse’s or common-law partner’s name, even though that individual may have little or no earned income. The benefit is greatest when a higher-income spouse or common-law partner contributes to an RRSP for a lower-income spouse or common-law partner. The primary purpose is to create a fund that will later (approximately in three years) produce taxable income for the spouse or common-law partner rather than the contributor. The contributor receives the short term benefit of the tax deduction for the contributions, while his/her spouse, who is likely to be in a lower tax bracket during retirement, receives the income and reports it on his or her tax return.

Canada Revenue Agency allows an overcontribution to remain without consequences as long as it does not exceed $2,000. Any amount in excess of $2,000 is subject to a penalty tax of 1% per month until that excess is withdrawn from the taxpayer’s RRSP.

December 31 of the year you turn 71 is the last day you can contribute to your RRSP. This year you have to choose one of the following options for your RRSPs:

Contact us for RRSP advice, to open RRSP account and start your retirement program.