RRSP Investment
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- A Registered Retirement Savings Plan (RRSP) is a personal savings plan registered with the Canadian federal government allowing you to save for the future on a tax-sheltered basis.
- An RRSP is an investment portfolio - your designated retirement savings. It can contain a variety of investments including: RRSP savings deposits, treasury bills, guaranteed investment certificates (GICs), mutual funds, bonds, and even equities.
- Contribution to an RRSP is special as your contributions to it are tax deductible and your portfolio grows tax sheltered.
- Tax deductions
Contributions reduce your taxable income, lowering the tax you pay so you can keep more in your pocket.
- Tax-deferral
Your investments grow, tax-deferred, while in the RRSP.
- Income splitting
Income-splitting can be achieved through a spousal RRSP which allows the higher income earning spouse to contribute to an RRSP in their spouse's name. These helps even out retirement income and lower your income taxes both now and in retirement.
- Life events
RRSPs can be used for more than just retirement. Canadian government programs allow you to access funds in your RRSP to help you buy your first home or pursue further education.
Anyone who files an income tax return and has earned income can open and contribute to an RRSP. There are limits on how much you can contribute to an RRSP each year. You can contribute the lower of:
- 18% of your earned income from the previous tax year. For most people, earned income for RRSP purposes is the amount in box 14 of their T4 slips. Earning income also includes self-employed net income, CPP/QPP disability payments and net rental income, OR
- The maximum annual contribution limit for the taxation year MINUS any company sponsored pension plan contributions (defined as pension adjustment on your T4 slip. A PA represents the value of any pension benefits accruing from participation in a registered pension plan or deferred profit sharing plan) If you are a member of a pension plan, your pension adjustment will reduce the amount you can contribute to your RRSP.
- The maximum contribution amount for the current tax year: $26,010 for 2017.
There are two programs you can use to take money out of an RRSP plan without incurring tax. They are the Home Buyers’ Plan (HBP) and the Lifelong Learning Plan (LLP).
- With the HBP you can take up to $25,000 out of your RRSP to put towards the down payment on your first home and you won’t be taxed on it. But you’ll have to pay it back into your RRSP over the next 15 years.
- With the LLP, the rules are slightly differently. You can withdraw up to $10,000 a year, or up to $20,000 in total each time you participate in the LLP to help pay for your or your spouse’s education. You can’t use it for your child’s education. All you have to do is repay at least 10% per year for up to 10 years. Participants must start to make repayments two years after their last eligible withdrawal, or five years after the first withdrawal, depending on which due date comes first. Amounts withdrawn must be repaid in 10 years.
- EXISTENCE:
RRSPs have been around a lot longer than their tax-free cousin. The RRSP was introduced in 1957 by the Liberal government of Prime Minister Louis St. Laurent. Fifty-one years later in 2008, the Conservative government of Prime Minister Stephen Harper rolled out the Tax-Free Savings Account.
- AGE RESTRICTION:
There is no minimum age for starting an RRSP, but you do need to have an income. The very last day you’re allowed to contribute to your RRSP is December 31 of your seventy-first year. Meanwhile, you can’t open a TFSA until you’re at least 18 years old and there’s no upper age limit for contributing to the tax-free savings vehicle.
- CONTRIBUTION LIMITS:
If you are not a member of a registered pension plan (RRP) or deferred profit sharing plan (DPSP) through your employer, the RRSP contribution limit for 2016 is 18% of your 2015 income up to a maximum of $25,370. So if you earned $45,000 last year, your contribution limit this year will be $8,100. The TFSA contribution limit this year for all Canadians over 18 years of age is $5,500, regardless of income. Also, any unused TFSA contribution room rolls over each year. In fact, an adult who was 18 when the savings tool was introduced in 2009, would have accumulated $46,500 in contribution room, as of 2016.
- TAX EFFECT ON CONTRIBUTION:
Contributions to RRSPs are made with before-tax money. In other words, you don’t pay income tax on RRSP contributions, which makes for a larger tax refund when you file your return. Alternately, TFSA contributions are made with after-tax money. This means you have already paid the income tax on any money put into your TFSA so it can’t help lower your tax burden like the RRSP.
- TAX EFFECT ON WITHDRAWAL:
As RRSP contributions are tax deductible, any withdrawals made from your RRSP are taxed in accordance with your income that year. Contributions to your TFSA have already been taxed, so any withdrawals you make are tax-free. This means that any growth you earned inside your RRSP is taxable but the growth earned inside your TFSA is, well, tax-free.
- UNUSED CONTRIBUTION:
Both RRSPs and TFSAs allow you to carry forward unused contribution room. However, if you choose to withdraw funds from your RRSP, the contribution room is lost and you don’t get to replenish it later. On the other hand, if you take money out of a TFSA, the amount withdrawn will be added back to the next year’s contribution room.
The following are the three tax advantages to your RRSP Contribution:
- Tax-deductible contributions
You get immediate tax relief by deducting your RRSP contributions from your income each year. Effectively, your contributions are made with pre-tax dollars.
- Tax-sheltered earnings
The money you make on your RRSP investments i.e. your interest or investment income is not taxed as long as it stays in the plan.
- Tax deferral
You'll pay tax on your RRSP savings when you withdraw them from the plan. That includes both your investment earnings and your contributions. But you have deferred this tax liability to the future when it’s possible that your marginal tax rate will be lower in retirement than it was during your contributing years
Following are the types of RRSP accounts and it can be set up with either one or two associated individuals:
- Individual RRSP is associated with only a single person, called an account holder. With Individual RRSPs, the account holder is also called a contributor, as only they contribute money to their RRSP.
- Spousal RRSP allows a higher earner, called a spousal contributor, to contribute to an RRSP in their spouse's name. In this case, it is the spouse who is the account holder. The spouse can withdraw the funds, subject to tax, after a holding period. A spousal RRSP is a means of splitting income in retirement: By dividing investment properties between both spouses each spouse will receive half the income, and thus the marginal tax rate will be lower than if one spouse earned all of the income.
- Group RRSPis where, an employer arranges for employees to make contributions, as they wish, through a schedule of regular payroll deductions. The employee can decide the size of contribution per year and the employer will deduct an amount accordingly and submit it to the investment manager selected to administer the group account. The contribution is then deposited into the employee’s individual account and invested as specified. The primary benefit with a group plan is that the employee-contributor realizes the tax savings immediately, because the income taxes his or her employer must deduct on every paycheque can be reduced. By contrast, if a taxpayer making a private contribution is not expecting to owe more than $3,000 ($1,800 in Quebec) at the end of the year, then he or she will have to wait until the end of the tax year (or even not until after that in the case of taxpayers expecting a refund) before realizing the benefit.