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Account Basics: Everything you need to know about RRSPs

by Invisor Last updated on January 23, 2018 Tags: Save Well, Account Basics

Curious about Registered Retirement Savings Plans (RRSPs) and if they could be the right investment account to help you reach your retirement goals? Check out the information below to learn more about RRSPs and how they can help you save more towards your retirement.

What is an RRSP?

An RRSP is an investment account designed primarily for saving toward your retirement years. The primary benefit of an RRSP is that you can forego paying tax today in lieu of paying it upon retirement.

Everything you need to know about:
RRSP contributions 

  • Contributions to your RRSP reduce your taxable income that year by the amount your contributed
    • Before-tax contributions (i.e. directly from your paycheck) are not taxed
    • After-tax contributions will reduce your tax payable at year end and you will receive a tax benefit
  • Each year, the lesser of 18% of your earned income or $26,500 (the 2018 limit) is added to the total amount you can contribute to your RRSPs
  • Any amount you don’t contribute (in each year) is carried forward to the following year
    • For example, if your total unused contributions, plus this year’s 2018 limit, is 50k and you contribute 10k, in 2019 your total allowable contribution will be 40k plus whatever your 2019 limit is.
    • To find your RRSP contribution limit, see amount (A) of the RRSP Deduction Limit Statement on your latest Notice of Assessment or log in to My Account or MyCRA on the CRA website to view it.
  • You can contribute to your RRSP up to December 31 of the year you turn 71

Everything you need to know about: 
RRSP withdrawals 

  • Withdrawals from RRSPs are taxed as income. If you withdraw $10,000 from your RRSPs it’s like adding $10,000 to your taxable income for the year.
  • Since the income is taxable, institutions are required to withhold tax on larger RRSP redemptions. Similar to how employers are required withholds income tax on employee paychecks.
  • You can withdraw all, or part of your RRSP at any time subject to tax or other terms of investment.
  • Upon retirement, investors generally transfer the balance of their RRSPs to a Registered Retirement Income Fund (RRIF) where income can be drawn from the balance on a scheduled basis.

Things you may not know about RRSPs

  • Pension contributions from you and your employer reduce your RSP contribution room
  • A tax of 1% per month may apply to excess contributions
  • You can contribute to a prior year’s RSP within the first 60 days of the following year
  • Your RRSP can be transferred tax-free to a beneficiary spouse should you pre-decease them
  • First Time Home Buyers Plan – both you and your spouse can withdraw up to $25,000 from your RSP tax free and put it towards your first home. The loan must be repaid over 15 years.
  • Lifelong Learning Plan – you can withdraw up to $20k if you plan on going back to school. The loan must be repaid over 10 years.

Financial planning advice 

  • For most Canadians, the RSP is the most important, tax-effective investment they can make. Because of the tax-sheltered growth allowed inside a registered account, it's equally effective when interest or dividend-paying investments are held within it. It's important to note that there are no capital gains paid when investments inside a registered account are bought and sold.
  • If you think your tax rate will be higher when you retire than it is today, then it would be wiser to put your money into a different tax efficient account like a TFSA.
    • Since the RRSP is a tax-deferring investment vehicle, you defer taxes at the lower rate today, compared to later on when they'll be higher. If you don’t have room in your TFSA, another option is to contribute to your RRSP, but defer claiming the tax benefit to a year where your taxes are higher.

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