Find the Best RRSP GIC Rates
Thinking about opening a RRSP? Let Ratehub.ca help you find the best RRSP GIC term and rate.
No matter what age you are, you know you’re going to retire from the workforce one day. Whether that’s ten years from now or forty years from now, it’s inevitable – and you should start planning for how that’ll affect your finances, sooner rather than later. In 1957, the federal government launched a specific savings account designed to help us save for our retirements; it was called a registered retirement savings plan (RRSP). Here’s some basic information about how RRSPs work.
Thinking about opening a RRSP? Let Ratehub.ca help you find the best RRSP GIC term and rate.
A registered retirement savings plan (RRSP) is a savings account that allows Canadians to put aside money for retirement in a tax-friendly manner. Every Canadian citizen aged 18 to 70 who files a tax return may open and contribute to an RRSP. Each dollar you contribute is deducted from your taxable income for that year, which reduces the amount of tax you have to pay the government. Depending on how much you earn annually, your contributions could even put you into a lower tax bracket, meaning you’d have to pay even less tax than before. For these reasons, you can see why Canadians are incentivized to save for retirement in an RRSP.
Each year, Canadians are permitted to contribute 18% of their income in the previous year (i.e. wages, rental income, research grants and investment income) up to a maximum of $24,9301. For example, if you earned $50,000 in 2014, you’d be able to contribute $9,000 ($50,000 x 18%) to your RRSPs in 2015.
One thing to note is the “year” in which RRSP contributions count is not the same as our usual calendar year. Contributions can technically be made year-round, but the amount you’d enter in your income tax return would be whatever you contributed from March 1 to the last day of February. So, when you file your tax return for 2014, you’d include all the RRSP contributions you made from March 1, 2014 to February 28, 2015.
There are three main benefits to opening and contributing to an RRSP:
There are four basic types of RRSPs:
Beyond these four types of RRSPs, you also need to decide if you’re going to open and contribute to an Individual RRSP, a Spousal RRSP and/or a Group RRSP. As an individual, you may open an RRSP for yourself and your contributions are deducted from your personal income taxes. A Spousal RRSP is in your spouse’s name, but you may make contributions for them and still receive the tax deduction. You can also contribute to a Group RRSP, which is a pooled savings plan offered by some employers. With Group RRSPs, contributions are automatically deducted from your paycheque and your employer may match those contributions.
Many different investments can be held in an RRSP. These include:
RRSPs may be opened at banks, credit unions/caisses populaires, brokerage firms, insurance companies and trust companies. If you already have an account with a financial institution, it is also possible to open an RRSP online.
As mentioned above, one of the advantages of contributing to an RRSP is that your contributions are tax-deductible – but you have to pay tax on them eventually, and that day comes when you decide to make a withdrawal. Whenever you withdraw money from your RRSPs, the amount you take out will be subject to tax at whatever your current tax rate. For example, if you were strapped for cash and needed to make a withdrawal in your 40s or 50s – the years you’re probably making the most money in your career – you’ll be taxed at whatever your marginal tax rate is then. For this reason, it’s important to try and leave the money in your RRSPs untouched until you actually retire, so you’re in a lower tax rate (and therefore get to keep more of your money for yourself).
There are two situations in which you may withdraw money from your RRSP tax-free. The first is when you are buying your first house. In this event, you (plus your spouse) may withdraw up to $25,000 each (up to $50,000 total) tax-free from your RRSP for a down payment, through the RRSP Home Buyers’ Plan. You must, however, repay the amount to your RRSP within 15 years. The second reason you can withdraw money from your RRSP tax-free is if you want to pay for education and training for you or your spouse (but not for your children). Through what’s known as the Lifelong Learning Program, you can withdraw up to $20,000 total (max. $10,000/year) from your RRSP tax-free, but it must be repaid within 10 years.
When you turn 71, your RRSP must be terminated or converted into a registered retirement income fund (RRIF) or an annuity. Terminating your RRSP (i.e. withdrawing the full amount) would result in a hefty tax bill, because you’d be taxed at the marginal tax rate associated with the balance of your account (the higher the balance, the higher your tax rate); this means you’d have to give a good portion of your savings to the CRA. RRIFs and annuities, however, provide a steady stream of income during retirement and are much more tax-friendly.
If you’re just beginning to start planning for retirement now, know that RRSPs are not the only savings vehicle to choose from – you can also save for retirement using a tax-free savings account (TFSA). However, while both accounts tax shelter any gains made on your investments, only your RRSPs contributions are tax-deductible. On the other hand, you’ll never have to pay tax when you make a withdrawal from your TFSA. Because they both come with different benefits, many Canadians are confused about which option makes the most sense for them. You can read more about the TFSA vs. RRSP debate on our site.