What is a Registered Retirement Savings Plan (RRSP) ?
The Government of Canada offers the Registered Retirement Savings Plan (RRSP) to Canadians as a tax deferred way to invest and grow their retirement fund. To understand how RRSP works, we have to understand the concept of tax deferral. There is a difference between tax deferral and tax free. Tax deferral means you do not have to pay the tax NOW however, you are liable and owe tax to Revenue Canada in the future.
Any money you have contributed to a RRSP will be deducted from your total taxable income. Since your taxable income will be lower after the RRSP contribution, you will pay less tax and possibly enjoy a tax refund. You will continue to enjoy this benefit until you take out your RRSP. The amount you take out from the RRSP will become taxable income again.
Tax deferral remains a benefit because, in theory, income tends to be lower in retirement than in your peak earning years.
Why do I want an RRSP account?
Who can buy a RRSP?
Any Canadian who has earned income, has a social insurance number and has filed a tax return, can make a contribution up until December 31 of the year they turn 71.
When you turn 71, you have until December of that year to convert your RRSP into a Registered Retirement Income Fund (RRIF) or withdraw funds.
How much I can contribute?
Standard Contribution: Rule of Thumb
The straightforward answer is 18% of your taxable income or the maximum annual contribution limit ($26,500) for the taxation year announced by the Government of Canada.
In other words, if you made less than $147,222 last year, your RRSP contribution limit is 18% of your taxable income last year.
Reality: Everybody’s RRSP limit is different
Contributing more than the limit is ALLOWED if you haven’t contributed to the maximum allowance in the previous year(s). As a result, everybody have a different contribution limit.
To find your contribution limit:
- Access your tax information using the My Account tab on the Canada Revenue Agency (CRA) website.
- Click on the tab located on the right side of the screen that says Go to Tax returns
- A chart that says Tax returns and Notice of Assessment and Reassessment will have all the information you need.
- Click on 2017 Notice of Assessment
- The chart below shows all the information the CRA takes into consideration in order to show your Available contribution room for 2018.
CAUTION! Over Contributions Penalty
- $2,000 lifetime over-contribution limit
- 1% penalty tax is applied per month on over-contributed amounts when money is withdrawn from the account
Where can I invest my RRSP money?
You can contribute your RRSP money into different forms of savings such as: a high-interest savings account, stocks, mutual funds etc.
Just be careful because not all forms of investment are RRSP eligible. Consult your bank or your financial advisor before you make the investment.
How can I take money out of my RRSP account?
Early RRSP withdrawal
- If you take money out early (before 71 years old) from your RRSP, you will have to pay back the tax that you have deferred at the time of contribution.
- You may have to pay additional tax when you declare the RRSP withdrawal as income on your tax return.
Borrowing from your own RRSP
The Government of Canada allows you to borrow from your RRSP tax free to buy your first home (Home Buyers Plan) or pay for your education (Life Long Learning Plan).
ALWAYS TALK TO A PROFESSIONAL
Contact a HomeHow advisor for a free First Time Home Buyer consultation to understand more about the Home Buyers Plan.
HomeHow strongly encourages you to consult your bank, your financial advisor, or your accountant before making your RRSP investment to reap the maximum benefits!