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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.

A middle aged couple reading the finance section of the newspaper

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.

Helpful Tax
Advantages

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 an advisor. We 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.

Let's create a custom plan
that works for you.

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.

  • How do I know I am an executor?
    You will know if you are the executor of an estate if you are named as one in the will of the will-maker. If you are trying to figure out if you're an executor, the first step is to find the original will. Then, contact the lawyer who is handling the will and have them confirm that the copy you have is the most recent copy written. In BC, there is a will registry through Vital Statistics. Click here to learn more. If you know in advance that you are indeed the executor of someone’s will, ask them to prepare an estate inventory in advance for you. This should include assets, liabilities and digitals passwords.
  • Does an executor get paid?  How much?
    Short answer: Yes, anyone who serves as an executor is entitled to compensation for their time and effort. Sometimes the will-maker may determine the executor's fee ahead of time. However, if the will doesn't set out a fee, generally, the executor is entitled up to 5% of the value of the estate, plus 5% of any money earned by the estate after the will-maker dies, and 0.4% per year based on the average value of the estate under management. In our experience, the amount that the court will allow an executor to claim depends on how much work was involved and whether the executor paid for professional help or did it on their own.
  • How long does it take to handle an estate?
    This question will have a different answer each time. Ultimately, the timeline depends on how well the estate was prepared for the executor and family before the will-maker passes away. Obtaining tax clearance from the CRA alone could take 8 months or more until final distribution. If there are minor children involved, an executor may have to monitor the trust until the youngest child reaches the age of majority (currently 19 in BC). Regardless, we recommend working with professionals you trust who will know the deadlines you will need to meet when serving as an executor.
  • When can executors take charge of the estate?
    The executor becomes legally responsible for the deceased’s estate and personal property as soon as the will-maker passes away. As the executor you have authority to arrange the funeral, access safety deposit boxes for documentation, and secure assets. Keep in mind, if you decide that you are unable or not wanting the position, you need to speak with an estate lawyer before acting on any executor responsibilities. Once you start dealing with estate assets, you will be legally-bound to continue.
  • Who pays for the funeral if you are the executor?
    In some cases, we see the funeral services pre-organized and paid for by the will-maker or estate of the deceased to alleviate stress on the family. However, in our experience, there are times when the executor or family of the deceased are required to pay the funeral expenses up front. If that happens, they may be reimbursed by the estate as long as there is enough money in the estate to cover the reimbursement. Take note, ahead of time, there may be various types of insurance available for you or your executor to cover these types of final expenses when the time comes.
  • What is involved when you probate an estate?
    In BC, probate refers to two things: 1. Ensuring that the will is legal and authentic. 2. The general administration of the assets included in a deceased person's will. Essentially, probate is a legal procedure which includes confirming the validity of the will and that you have the authority to be acting as executor. The probate process ends once a clearance certificate is received by the CRA and all assets are distributed to the beneficiaries. Pro Tip: You don't always need to apply for probate. This all depends on the type of assets within the estate. In many cases, certain assets can be passed down without requiring probate - an example would be segregated investment funds and other insurance products. As certified executor advisors, we're here to help will-makers and their executors expedite the probate process. Reach out anytime at 250-861-7777.
  • What assets are included for probate purposes?
    Typically, we see assets such as the family home, other real estate, furnishing, vehicles, personal effects, bank accounts, bank investments, and mutual funds go through probate. However, not all assets will go through probate. These include: - Jointly owned assets (which are passed to the surviving owner by right of survivorship). - Designated assets (such as life insurance or investments like segregated funds - RRSPs, RRIFs, TFSAs) with pre-designated beneficiaries.
  • Is it difficult acting as an executor?
    Short answer: it depends. In our decades of experience, one thing we've learned is that no two cases are the same. Some families get along and the process is smooth sailing. Other families find themselves fighting in probate for years. If you are considering becoming an executor for someone, here's a few questions to ask: What do you know about the family? Do they get along or are there conflicts to consider? Are there minor children involved? Are there step or estranged family members to consider? Was the deceased organized? What is the extent of the assets? Will there be any liabilities? Is there a business to consider? Is there property other than the family home? Have their taxes been kept up to date? Do they have foreign assets? Do they have property in other provinces? What are your plans for the next 18 months or more?
  • What problems could executors face?
    In our decades of experience working as certified executor advisors in BC/ Alberta, many of the issues we've guided executors through include: Homemade Wills Business assets Contested Wills Claims made by creditors Disappointed beneficiaries Step or estranged family members Former common-law spouses Claims by dependants If you're aware of your executor duties before the estate owner passes away, we recommend sorting out these issues ahead of time to avoid a lengthy probate process later on.
  • When should executors get help from professionals?
    In our experience, especially in complicated cases, some of the executors we work with opt to hire a lawyer to guide them through the process of probate. Generally, most executors get legal consult when there's business interests left behind by the will-maker. As for keeping the estate in financial order, we recommend executors hire an accountant to prepare the estate accounts and tax returns. Here at Thom & Associates, we can refer you to professionals we've worked with in the community over our decades of experience. We always recommend recording any advice you receive from professionals and in some instances asking for the advice in writing so you can refer back to it.
  • Is there always an executor when someone dies?
    This is a trick question—when someone dies without a will, technically there isn't an executor. There will, however, be someone who takes on all the responsibilities of an executor. That person is called the administrator or the personal representative.
  • What happens if there is no executor when someone dies?
    If no one is declared to be an executor of the estate in question, a person (usually a friend, family member or another interested party) may come forward and petition the court to become the administrator of the estate by obtaining letters of administration. If no one comes forward on their own, the court may ask a person to serve as an administrator.
  • What if I don’t want to be an executor?
    As a rule, it's best practice for the will-maker to ask for permission before electing an executor. Keep in mind that there is no obligation for you to accept the position and that you can say no at that time. Before you agree to become an executor, we strongly recommend that you feel comfortable in your abilities and are willing to take on the potentially considerable time constraints of an executor. As the executor, it’s your responsibility to keep accurate records, make many decisions, and monitor all estate activity. Even if you get help from others, at the end of the day, you are legally responsible for the estate. If you don’t do the job properly, you could be held personally liable. If you decide that you are unable or not wanting the position, speak with an estate lawyer before acting on any executor responsibilities. Once you start dealing with estate assets, you will be legally bound to continue.

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.

Book an appointment to learn more.

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.

Book an appointment to learn more.

Should you open a TFSA or a RRSP?

The best time to start is now. Get in touch today.

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