What is an RRSP?
A Registered Retirement Savings Plan (RRSP) is a plan in which you register investments in order to save money for your retirement. The plan is registered with the Canada Revenue Agency (CRA). An RRSP defers income tax. You do not pay tax on the income that accumulates in the plan, as long as it remains in the plan. However, if you withdraw registered investments from the plan, you generally have to pay tax on any withdrawals. An RRSP must be converted into retirement income before the end of the calendar year in which you turn 71.
Who can contribute to an RRSP?
• Tax payers who have earned income, as
defined under the legislation, or income
eligible for a transfer to an RRSP.
• There is no minimum contribution age1 and
you can contribute up to December 31 of the
year you turn 71.
ADVANTAGES OF AN RRSP
• Your disciplined savings approach is
immediately rewarded in the form of
a tax refund or tax savings.
• Your investment returns are tax-sheltered,
meaning they are not taxed as long as they
remain in your plan.
• When you reinvest your tax refund, it’s as
though the government has lent you the
money from your taxes interest-free, so that
you can make it grow until you retire!
• You won’t be tempted to use your savings
before you retire, since all withdrawals from
the plan are taxed.
• Subject to certain conditions2, your RRSP is
creditor proof in the event of bankruptcy.
Borrowing from your RRSP?
Want to withdraw money from your RRSP? You should know that you cannot recover your right to contribute
after you make a withdrawal, as the withdrawal does not
free up additional contribution room. The amounts you
withdraw will also be added to your taxable income. However, you can temporarily withdraw a certain
amount from your RRSP without paying tax to purchase a first home, as part of the Home Buyers’ Plan (HBP) or to return to your studies, under the Lifelong Learning Plan (LLP).
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How much can you contribute?
Every year, after you file your tax return, the Canada Revenue Agency sends you a Notice of Assessment that includes a section entitled RRSP Deduction Limit. It indicates the exact amount of your maximum allowable contribution for the following year. This amount is based on your earned income, the annual contribution limit, whether you are a member of an employer pension plan and any unused contribution room, where applicable.
Still have some contribution room left? The unused portion will be carried forward indefinitely to use in future years, until you have used it in full.
Are you contributing more than the limit? When you over-contribute in excess of $2,0003, your excess contribution is subject to a penalty of 1% per month, until it is withdrawn.
If you have a spouse and you are the higher earner, it may be advantageous to contribute to your spouse’s RRSP. You can use your unused contribution room to do so. The money will, however, be invested in the name of your spouse. You, in turn, will benefit from the tax deductions you would have received had you made this contribution to your own RRSP. This strategy allows you to reduce the tax bill for both of you at retirement, if your spouse is taxed at a lower rate, because he or she earns less than you do. This is known as income splitting. But be careful! If your spouse makes a withdrawal from the RRSP within two years of your contribution year, you’ll be taxed on the withdrawal.