Registered Retirement Savings Plan (RRSP)
An RRSP is a retirement account with major tax advantages. Start building your savings early for a rewarding retirement.
Continue reading to learn more.
What is an RRSP?
Essentially, a Registered Retirement Savings Plan (RRSP) is a savings account registered through the Canada Revenue Agency (CRA) that offers Canadians incentives to save for retirement.
Created for the purposes of investing and building retirement savings, any money you deposit into your RRSP account will be exempt from CRA taxes for the year you make the contribution. It’s an incredibly efficient way to minimize a current-year tax bill.
Generally, we encourage our clients to open an RRSP and contribute regularly until they turn 71. At this point, the RRSP will convert into a Registered Retirement Income Fund (RRIF) that allows you to make monthly withdrawals.
Take your investments to the next level
In an RRSP, as your investments grow, you don’t need to pay tax on the money until you withdraw from your account. Which means you get to keep more of your money for retirement.
Help buy your first home or further your education
Pre-retirement, the money from your RRSP can be used in a number of ways, including putting a down-payment on your first home or funding your (or your spouse’s) education.
An RRSP is considered to be a tax-advantaged account. The government created RRSPs to offer Canadians tax breaks as an incentive for them to put money away for retirement.
How does it work?
First, meet with Ken. He can help you design the best plan for a RRSP tailored to your retirement goals and risk tolerance.
Calculate the right contributions for your retirement goals while ensuring that you stay within your designated contribution room.
Reduce your overall tax bill by deducting your annual contributions from your tax bill.
Access your money when you need it, but keep in mind that in most situations the withdrawals will count as taxable income. (Want to build a savings account that you can access anytime without penalty? Open a TFSA)
Consider the option to withdraw from your RRSP tax-free if the money is used towards buying your first home or paying for your (or your spouse’s) education.
Every bit of investment growth will grow tax-free.
Once you retire (or turn 71), your RRSP converts into a RRIF. It’s time to start spending the savings you’ve been building.
Tax-Related Benefits of the
Registered Retirement Savings Plan
There are a number of advantages to starting an RRSP, especially when it comes to being tax-efficient.
1. Tax-deductible contributions
When you contribute to an RRSP, you’ll receive an instant tax benefit in the form of tax-relief. Since taxes owed are calculated on your gross income minus your contributions, it will result in lower taxable income.
If you’d like to be extra tax-savvy, get the most from this tax relief by reinvesting your tax returns.
2. Tax protection on your returns
Returns gained on your RRSP investments will not be taxed until you start to withdraw in retirement.
What does this look like in real life?
Let’s say you are paid $88,000 per year and max out your contribution amount by depositing $15,840 (18% of 88,000) into your RRSP. When it’s time to pay your taxes, the CRA will tax you as if your salary was $72,160 (88,000 - 15,840). In a way, it’s almost like paying yourself twice!
3. Tax deferral
By the time you’re ready to change your focus from saving for retirement to spending during retirement, your RRSP portfolio will be a collection of interest/returns earned in addition to all of the contributions you made over the years.
Presuming that, like most Canadians, you will be earning less income as a retiree, you will be taxed at a lower interest rate on any withdrawals that come out of your RRIF (formerly your RRSP prior to retiring or turning 71).
Take note, for our younger clients starting on an entry-level salary, we recommend building your savings in a Tax-Free Savings Account during the early/ ‘low-income’ earning years.
Additional Benefits of the Registered Retirement Savings Plan
Income splitting between spouses
If one spouse is in a considerably lower tax bracket than the other, this is a major advantage come retirement time. For both people, withdrawals from their RRSP will be taxed at the lower rate, resulting in a lower overall tax bill.
Eligibility for other Government Benefits
When you contribute to an RRSP, the deductions lower your net income. This may help you qualify for benefit programs such as the Canada Child Benefit (CCB) which is a refundable credit based on family net income.
Deadline for RRSP contribution
There is never a wrong time to deposit money into your RRSP. However, if you’re contributing for the tax incentives, you need to contribute no later than 60 days after the end of the tax year (i.e. by February 29/ March 1 of the following year).
As an example, to claim a tax break for RRSP contributions made during the 2021 tax year, you will need to have that money deposited in your RRSP before March 1, 2022.
Any unused contribution room for your RRSP will roll over from year to year without penalty. At the end of the year in which you turn 71, you will have the options to either convert your RRSP into a RRIF (Registered Retirement Income Fund), cash it out, or purchase an annuity.
Reasons you may take money out
of your RRSP before retiring
With careful consideration, and within certain limits, there are two times you can
withdraw funds from your RRSP without being taxed.
Buying your first home
As a part of the Home Buyers’ Plan, you have the option to withdraw up to $35,000 from your RRSP to build or buy your first home.
You will be required to repay the amount that was taken out, but have up to 15 years to do so. In addition, the repayment period doesn’t begin until two years after the calendar year in which you made the withdrawal.
Paying for your education
With the Lifelong Learning Plan you can access up to $20,000 of your RRSP to put towards your or your spouse’s education.
Keep in mind, you’re only allowed to withdraw $10,000 per year and whatever you take out must be re-contributed over a period of up to 10 years otherwise you will be taxed on it.