A Registered Retirement Savings Plan (RRSP) is an account registered with Canada Revenue Agency under the Income Tax Act. RRSPs were set up by the federal government in 1957 to encourage Canadians to save for retirement.
Inasmuch as the account is Registered, RRSPs have the next advantages:
The idea is you leave all the money in the plan until you reach retirement age. Then you take it out gradually, over your retirement years, withdrawing some of the funds each year, declaring the withdrawals as income and paying tax on the amounts when you file your annual tax return. It is supposed while the RRSP income is taxed in full, the investor may be subject to a lower tax rate when he or she has retired and is receiving a lower taxable income.
Can I take money out of my RRSP to buy a house or finance my education?
Under the Home Buyer's Plan, if you have not owned the home you live in over the last five years, you can borrow up to $25,000* from your RRSP tax-free to buy a home. If your spouse has an RRSP, he or she can do the same, so that together you can come up with up to $50,000* under this plan. But the home purchase has to be carefully documented on special forms and the funds must be paid back within 15 years through annual contributions. If you fail to make the required annual repayment, the amount you should have paid back will have to be included in your income for that year and will be taxable.
* For 2009 and subsequent years, withdrawals made after January 27, 2009.
Under the Lifelong Learning Plan, you can also withdraw up to $10,000 a year over a four-year period to finance your own or your spouse's higher education, as long as the total amount doesn't exceed $20,000. Amounts withdrawn have to be repaid over 10 years, or they'll be included in the income of the person who made the withdrawal.
Can I contribute to an RRSP for my spouse?
You can use all or some of your RRSP contribution room to contribute to an RRSP in your spouse's name. This kind of RRSP is referred to as a "Spousal RRSP." You claim the tax deduction for the contribution, but the RRSP belongs to your spouse. Contributing to a spousal RRSP is a good idea if you think your spouse will have less income in retirement than you will and will therefore be an a lower tax bracket. That way, as a couple, you will save on taxes because your spouse will declare the retirement income provided by the RRSP.
How much can I contribute to my RRSP?
The amount you're allowed to deduct for tax purposes is often referred to as your "contribution room" or "deduction room." The limit for any tax year is 18% of your earned income from the previous year up to a dollar maximum of $25,370 (for the 2016 tax year).
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.
If you've had earned income for the past few years, but you didn't make an RRSP contribution during that time, your entitlement will be carried forward and added to this year's contribution limit.
The exact amount you're entitled to contribute for the tax year — which will include any unused contribution room carried forward from previous years — is shown in a separate section of the Notice of Assessment or Notice of Reassessment you received from the Canada Revenue Agency after you filed last year's tax return.
What investments can I hold in my RRSP?
Many kinds of investments are eligible for an RRSP, including:
Can I take money out of my RRSP?
You can withdraw funds from your RRSP or de-register the plan at any time, as long as you are 18 older. But amounts you withdraw or de-register must be declared as income and will be taxable in the year you take out the money.
Mandatory de-registration of an RRSP is required during the calendar year when an RRSP plan holder reaches age 71. At that time, the funds must be used to purchase an annuity or transferred to a Registered Retirement Income Fund. If you fail to select one of these options, the entire amount in your plan will be considered income and you will be taxed on it.
What is the Best Scenario for RRSP?
The best scenario is to put money in RRSP, when your marginal tax rate is high (for instance, 37%) and to withdraw it when your marginal tax rate is low (for example, 21%). In this case, you save 16% of your tax. The worst scenario is to make a deposit in your RRSP when your marginal tax rate is low (21%), and withdraw the money when your marginal tax rate is high (37%), you pay 16% more tax.
Contact us for more information and to discuss your investment and retirement program.
Revised: March 22, 2019.