Listen to our podcast episode on this topic, “RRSPs and TFSAs – Which one is right for you?”
Registered Retirement Savings Plans offer Canadians the opportunity to put money away for retirement. The big attraction is that investment gains are tax free and contributions are tax deductible.
What Is An RRSP?
A Registered Retirement Savings Plan is probably the best tax shelter available to the average Canadian. It gives you the opportunity to put money away for your retirement where the investment gains are tax free and the contributions are tax deductible. You only start paying tax on your registered savings when you start withdrawing. But the sting from the tax hit will likely be mitigated by the fact that you will be earning less income in retirement, so you’ll pay less money to the government.
What It Isn’t
It is NOT a form of investment. It is a vehicle to postpone paying tax and shelter gains. What you are doing is establishing a registered account for your money.
What Can I Put Into An RRSP?
Pretty much anything you like, including money, stocks, bonds, guaranteed investment certificates (GICs) and mutual funds.
How Do I Establish An RRSP?
This can be done at any financial institution.
How Much Can I Put Into My RRSP Annually?
Everyone has a limit as to how much can be put into a registered retirement account. People with a defined pension plan from their employer have less room than someone with no pension plan. Information on your particular limit can be found on your latest assessment from Canada Revenue Agency. You routinely receive such an assessment after you have filed your annual tax return. This is also contained on the T1028 form, “Your RRSP Information,” that is sent to you after you submit your tax return.
In 2015, the maximum RRSP deduction limit was $24,930. There is an annual deadline for contributing to your RRSP, either at the very end of February or the very beginning of March. For example, in 2016, the deadline for 2015 contributions was February 29.
Can I Carry Over RRSP Contribution Room?
You can. You can find the amount of your unused RRSP contribution room either through your latest tax assessment or on the T1028 form.
Is There Always a Tax Penalty For Early Withdrawal of RRSP Money?
No. The one exception is “The Home Buyer’s Plan,” which allows you to withdraw up to $25,000 annually to build or buy a home. You then repay that money you have taken in instalments. Repayments start the second year after you withdrew the funds and the money must be paid back within 15 years.
CRA will let you know annually how much you must pay back in a given year.
Are RRSPs Suitable For Everyone?
No. If you’re a low-income earner and in a low tax bracket now, then you’re not going to benefit from the refund that someone in a high tax bracket would benefit from. That sort of person might find a Tax-Free Savings Account more suitable. In a TFSA, your gains are tax exempt but the contribution is not tax deductible.
How Long Can I Contribute To An RRSP?
You can contribute to an RRSP until December 31 of the year you turned 71.
What Happens Then?
You must wind up your RRSP by the end of the year you turned 71. You then would open a Registered Retirement Income Fund, or RRIF. A RRIF is also tax-sheltered. You must withdraw a minimum amount from your RRIF every year and that amount increases every year.
For more information on RRSPs and RRIFs, investors are encouraged to check out the CRA website.