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A Registered Retirement Savings Plan (RRSP) can help you save and prepare for a fruitful, comfortable, and secure retirement. It can also provide some remarkable tax-benefits that can earn you more money over a lifetime of contributions. This article answers many frequently asked questions involving RRSPs.
The RRSP Contribution Limit and Deadline for 2020
This year’s RRSP Deadline is March 2, 2020. The RRSP Contribution Limit has increased to $27,830.
What is a Registered Retirement Savings Plan (RRSP)?
A Registered Retirement Savings Plan ( RRSP) is a registered savings account and tax-shelter. The primary purpose of a registered retirement savings plan is to help Canadians save for retirement.
However, through specific programs approved by the Government of Canada, an RRSP can also help you save for your education and help you purchase your first home.
RRSPs can hold savings, as well as various types of investments, such as Guaranteed Investment Certificates ( GICs), Exchange-Traded Funds (ETFs), mutual funds, stocks, bonds, and more.
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How does a Registered Retirement Savings Plan Work?
Though using an RRSP is reasonably straightforward, there are a variety of RRSP rules that come along with the savings and investment account.
Since RRSPs are registered accounts, they come with various tax-benefits and a contribution limit.
Contributions made to an RRSP grow tax-free, while reducing your yearly income tax.
Your RRSP provider will keep track of all your contributions and send you an RRSP Contribution Receipt.
When you do your taxes, you can deduct your RRSP contributions from your taxable income, which in turn will reduce the amount of tax you owe for the year. Interest in an RRSP grows tax-free.
Withdrawals from a registered retirement savings plan are taxable at the same rate as your income.
When you retire and begin to withdraw from your RRSP, your provider will withhold income tax from your withdrawal, much like your employer withholds income tax on your paycheque.
At the end of each year, your registered retirement savings plan provider will send you a T4 slip showing the total amount of money you withdrew from your RRSP in that year so you can do your taxes.
What are the benefits of a Registered Retirement Savings Plan?
There are quite a few benefits to using a registered retirement savings plan.
- You receive a tax deduction for the amount of money you contribute
- Your investments grow tax-free, which helps your retirement savings grow faster
- When you make withdrawals during retirement, you’ll likely be in a lower tax bracket and therefore pay less tax
- You can use your RRSP to help make a down payment on a home or help pay for your education
- RRSPs are insured, either by the CDIC or by Provincial Insurance, depending on the institution issuing the account
What is an RRSP Contribution Limit?
Since RRSPs are registered savings and investing accounts, meaning they are registered with the Government of Canada and come with a contribution limit. This limit is known as an RRSP contribution limit. Your RRSP contribution limit depends on your income.
The unused contribution room carries forward, as well. Every year you earn income, you make the RRSP contribution room. You can find your total contribution room on your most recent notice of assessment (NOA).
You’ll want to keep a careful eye on your limit if you think there’s a chance you could go over. Any contributions over your limit are penalized at a rate of 1% per month for every month until the excess amount or the new contribution room opens up.
What is an RRSP Deduction Limit?
The RRSP Deduction Limit is the maximum contribution that a person can contribute if 18% of their income exceeds the yearly limit. As of 2020, the annual limit is $27,230. Generally, you can contribute up to 18% of your earned income to your RRSP.
Who can open a Registered Retirement Savings Plan?
Anyone can open a registered retirement saving plan in Canada, as long as they have an employment history.
It doesn’t matter whether you’re single or married. Each individual is entitled to their own RRSP.
Once you turn 71, you are no longer eligible to hold or open an RRSP. Canadian citizens over the age of 71 are required to open a Registered Retirement Income Fund (RRIF). An RRIF allows Canadians over the age of 71 to withdraw funds at a low tax rate and on a regular basis.
How much does your RRSP reduce tax?
When you do your taxes in April of each year, you calculate the amount of tax you owe by adding up all your taxable income and deducting credits. Comparing the amount of tax you owe for the year to the amount you’ve already paid determines whether you will get a refund or have a balance due.
When you put money in your RRSP, your taxable income is reduced by the same amount as your RRSP contribution. If you earned $50,000 and contributed $1,000 to your RRSP, you’ll be taxed as if you made $49,000.
The exact amount your tax will be reduced by depends on your marginal tax rate, which is based on your income and varies by province or territory.
Can I make tax-free withdrawals from an RRSP?
Yes, you can withdraw money from your RRSP at any time, but you must know what comes with an RRSP withdrawal.
A few things happen when you withdraw money from your RRSP.
Your RRSP provider will withhold income tax, and you’ll have to add the amount of your withdrawal to your taxable income when you do your taxes.
Second, and more importantly, when you withdraw money from your RRSP, you don’t get that contribution room back. Your contribution limit remains the same, and you’ll miss out on the years of investment income that money could earn between now and the time you’re ready to retire.
If you think you’ll need to withdraw your money before retirement, you should consider investing in a Tax-Free Savings Account ( TFSA) instead.
Can I make tax-free withdrawals from an RRSP?
Withdrawals aren’t tax-free unless you use the money to buy a home under the Home Buyers’ Plan (HBP) and you’re a first-time buyer, or to finance an education under the Lifelong Learning Plan ( LLP).
You can withdraw up to $35,000 from your registered retirement savings plan for the HBP. You can also withdraw up to $10,000 in a calendar year and up to $20,000 in total for the LLP.
You have up to 15 years to make repayments to your RRSP when you withdraw money under the HBP and up to 10 years to make repayments under the LLP. You need to make equal instalment payments over the 15- or 10-year periods.
If you fail to make repayments for either plan, you have to include the amount you didn’t pay as RRSP income on your tax return.
Can I have an RRSP when I retire?
Yes, you can have a registered retirement savings plan when you retire. However, you can only keep your RRSP until you turn 71. At that time, your account becomes a Registered Retirement Income Fund (RRIF).
You can use the funds to purchase an annuity or do a combination of both.
You are also able to withdraw some or all of your funds from your RRSP. You may only want to do this if you have no other income or are in a low tax bracket.
If you are unsure what to do with your funds once you retire, it might be in your best interest to speak to a financial advisor.
Where can I get an RRSP?
You can open an RRSP online by clicking the button below. You can also visit any bank or credit union that issues registered retirement savings plans to open an account.