As we are getting closer to the RRSP deadline (March 1st, 2013) I thought it would be helpful to go over some basics of the Registered Retirement Savings Plan or RRSP. Whatever your age and situation it’s always a great time to take advantage of RRSP, but it is important to understand some RRSP basics.
RRSP is put in place to encourage working Canadians to save for their retirement, this is to lessen the burden on the government when Canadians retire. The idea is that throughout your working years you save a portion of your income in the RRSP plan and upon retirement you start withdrawing from it to supplement your CPP and OAS income.
What is an RRSP plan?
RRSP is a personal savings plan that is registered with the CRA which allows you tax shelter your investments. Any growth within your RRSP plan is tax deferred, not taxed until withdrawn, at which point it is taxed as an income.
Any contribution you make to your RRSP account is also tax deductible, you will get a tax refund based on your tax rate. Generally your tax bracket is lower ones you retire, hence you would be paying less tax while growing it tax free.
Let’s assume that during your working years your income is about $80,000 and your tax bracket is about 40% on $1000 you would be paying $400 in taxes. Let’s say ones you retire your income lowers and therefore your tax rate will too, your income is $50,000 now and your tax rate is about 35%. On $1000 income you would pay $350 in taxes. You will have saved $50 on taxes.This is a very simple example, in reality things maybe more complicated. But RRSP is one of the very few methods Canadians can reduce their tax bill and at the same time save for retirement.
What Type of Investment can I hold?
In your RRSP account you can hold variety of investments you can have a savings account, GIC’s, mutual funds, bonds, equities, gold or silver bullion and many more. The RRSP had a foreign content limit, however this has been removed.
If you have a non-registered account and hold interest bearing investments it would be more tax efficient to place them into the RRSP account since it will be tax deferred and place dividend stocks in your non-registered account where you can benefit from the dividend tax credit.
How much can I invest in RRSP?
There is a maximum amount you can invest in your RRSP account in any given year, it is the less of 18% of your taxable income or the annual maximum (2008=$20,000, 2009= $21000), note that pension contributions by your employer will reduce the amount you can contribute. 18% is based on the previous years earnings for example your 2010 RRSP contribution limit will be based on your 2008 income. Look at your last notice of assessment of the previous year or call CRA to find out your limit. You can over contribute by $2000 without a penalty, however this amount will not be tax deductible you would be able to deduct it the following year and enjoy 1 year of tax free growth. If you over contribute over $2000 it will be subject to penalties.
RRSP carry forward:
If you can not maximize your RRSP account, the contribution room will be carried forward indefinitely into the future so your contribution room will never be lost. If you withdraw from you RRSP account, you will increase you contribution room by the amount you have withdrawn.
RRSP Conversion to RRIF
RRSP account has to be converted to a Registered Retirement Income Fund (RRIF) or an annuity by December 31st of the year you turn 71. The difference between RRIF and RRSP is that you can not contribute fresh money into the account and have an annually minimum to withdraw depending on your age.
Where can I open an RRSP account?
RRSP accounts can be opened at any financial institution and you can have as many accounts as you want, provided you are not over your limit. RRSP Broker review.
When can I contribute to my RRSP account?
Any amount you contribute throughout the calendar year and 60 days on the following calendar year can be deducted from your income in the given year. On your 2008 return you can deduct contributions made up to March 2nd 2009.
I hope this was helpful, if you have any questions please post the below and I’ll try my best to answer them.