A Brief Intro to RRSPs

Posted 16 Oct 2014 by Natalie LeBlanc


Registered Retirement Savings Plans (RRSPs) are usually one of the first methods (besides perhaps pensions) that comes to Canadians’ minds when they think of saving for retirement. These plans allow you to make tax-deductible contributions (up to a certain limit based on your income) to grow the value of your savings without being taxed on the growth, and then withdraw (with applicable tax) the principle and earnings from the plan. Many Canadians, with the help of a financial planner, are able to structure their contributions and withdrawals in such a way that contributions are made in higher-taxed income years and withdrawals are made during lower income years (most often, the retirement years).

One of the most basic and important rules of RRSPs is the contribution limit. This is calculated by the Canada Revenue Agency (CRA) each year and is carried forward indefinitely from one year to the next. The amount of your limit is based on 18% of the previous year’s earned income, less any pension or other adjustments, up to a limit of $24,270 (for the 2014 tax year). The CRA will allow an excess contribution of $2,000 without penalty for those 19 years of age or older, but if you contribute more than $2,000 over your limit you will be subject to a penalty tax.

If you happen to have a lower-income-than-normal year, or have other credits that have already lowered or eliminated your tax bill, you can carry forward your RRSP contribution to be deducted in a future year. However, remember that your contributions reported on your RRSP receipt still have to be reported on your tax return for that current year.

Spousal RRSPs

Spousal RRSPs are also available, where one spouse (usually the higher income earner, the “contributor”) builds RRSP contribution room, and then makes the contribution into a spousal RRSP in their spouse’s name (“the annuitant”). This way, the RRSP can be withdrawn from and be taxable to the lower-income earner, the annuitant, saving on your joint tax bill. There is an exception however: funds that are withdrawn within three years of the contribution are taxable to the contributor, not the annuitant of the plan. The spousal RRSP is entirely owned and controlled by the spouse in whose name the plan is held, the annuitant (an important factor during marriage breakdowns).

Withdrawals from an RRSP

You can make a taxable withdrawal from your RRSP at any time. Tax is withheld by the plan administrator (Quadrus, for example) and reported to the CRA toward your total taxes and income. There are programs in place by the CRA that would allow you to withdraw from your RRSP, without tax, to pay for post-secondary education for yourself or a spouse (the Lifelong Learning Plan) or to buy a house for the first time (First-Time Home Buyers Plan). Unless otherwise requested, the applicable tax rate (in provinces other than Québec) is:

Amount of Withdrawal

Applicable Tax Rate

Up to $5,000

10%

$5,000.01 to $15,000

20%

$15,000.01 and up

30%

 

RRSPs certainly have many tax advantages, all while helping you create a nest egg to support yourself during your retirement years. Talk to one of our advisors today about your options to save.

SOURCE: https://www.invesco.ca/publicPortal/ShowDoc?nodePath=/BEA%20Repository/common/library/PDF/tax_planning/TERRSP//eBinary