To preserve and maximize your income and lifestyle in retirement, preparing and saving for your retirement well in advance is paramount. A Registered Retirement Savings Plan or RRSP is a type of Canadian account for holding savings and investment assets. Introduced in 1957, the RRSP's purpose is to promote savings for retirement by employees. It must comply with a variety of restrictions stipulated in the Canadian Income Tax Act. Rules determine the maximum contributions, the timing of contributions, the claiming of the contribution tax credit, the assets allowed, and the eventual conversion to an RRIF (Registered Retirement Income Fund) in retirement.An RRSP may help you on that path to financial health.An RRSP is a program available to many Canadians that provides an income tax deduction in the year the contribution is invested, providing Canada Revenue Agency's™ criteria is met, or if the contribution is made in the first 60 days of the following year. The contribution accumulates and earns interest in the investment on a tax-deferred basis, meaning, you will pay income tax when the funds are withdrawn from the plan.
RRSP accounts can be setup with either one or two associated individuals:
An individual RRSP is associated with only a single individual, termed an account holder. With an individual RRSP the account holder is also called a contributor, as only they contribute money to their RRSP.
A Spousal RRSP allows a higher earner, termed a spousal contributor to contribute to an RRSP in the spouse's name. In this case it is the spouse who is the account holder. The spouse can withdraw the funds, 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 as a result the marginal tax rate will be lower than if one spouse earned all of the income.
In a group RRSP the 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 difference with a group plan is that the contributor realizes the tax savings immediately, instead of having to wait until the end of the tax year.
A RRSP deduction limit is the maximum amount of RRSP contributions that can be claimed on a tax return for a given tax year.
A deduction limit is calculated as the unused deduction limit from the prior year, plus 18% of a person's earned income from the previous calendar year up to a specified maximum, less any pension adjustment (PA) and past service pension adjustment (PSPA), plus pension adjustment reversals (PAR).
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If you qualify to invest in an RRSP, here is what you need to know:
Maximum Annual RRSP Contribution Limits*
Your allowable RRSP contribution for the current year is the lower of:
18% of your earned income from the previous year, or
The maximum annual contribution limit for the taxation year, or
The remaining limit after any company sponsored pension plan contributions or pension adjustment (PA), and past service pension adjustment (PSPA), plus pension adjustment reversals (PAR).
Earned income includes salary or wages, alimony received, and rental income, among other income sources, but does not include items such as investment income.
*If you did not use all of your RRSP deduction limit for the years, you can carry forward unused contributions to the following year. Therefore, your RRSP deduction limit may be more than the amount above.
Note: You cannot deduct the interest you paid on money you borrowed to contribute to an RRSP.
You cannot claim a deduction for any of the following:
You can find the amount of your unused RRSP contributions from previous years by going to the amount (B) of the RRSP Deduction Limit Statement, on your latest notice of assessment or notice of reassessment.
If you did not deduct all of the contributions you made to your RRSP or your spouse's or common-law partner's RRSP in 1991 and later years, you have two options:
You may contribute to your RRSP until December 31 of the year in which you reach age 71.
To be eligible for an RRSP deduction in a specific taxation year, you can make contributions anytime during the year, or up to 60 days into the following year.
As a member of a company-sponsored registered pension plan or deferred profit sharing plan, the amount that you can contribute to your RRSP must be reduced by the total value of the pension credits you earned for the year. This amount is referred to as a pension adjustment (PA) and it is reported on the T4 slip (Statement of Remuneration Paid) that you receive from your employer.
If you can't make your maximum contribution one year, you can make up that portion of the contribution in later years by carrying it forward. The amount of your unused contribution limit is shown on your federal Notice of Assessment. You may also choose to delay claiming your current year's RRSP tax deduction. To take the deduction in a later year, you must make sure that your allowable deduction limit has not been reached.
If you make an RRSP contribution beyond your maximum allowable amount for a year it is considered an over-contribution. There is a lifetime allowance of $2,000 for over-contributions. These contributions must be used before any new contributions are applied.
You may open as many RRSPs as you wish. You are free to transfer your RRSPs between financial institutions at any time without being subject to tax. You can also move some or all of your money between eligible investments within your RRSP.
The Home Buyer's Plan allows you to borrow funds from your RRSP to purchase your first home. Here are some of the key facts:
The Lifelong Learning Plan allows you to pay for training or education with RRSP funds. Here are some of the key facts:
Funds withdrawn from an RRSP will be charged withholding taxes. This amount must be held back by the plan administrator and remitted to the government on your behalf. Effective January 1, 2005, the following withholding tax rates apply:
|Amount of RRSP Withdrawal||All Provinces Except Quebec||Quebec|
|Up to and including $5,000||10%||21%|
|$5,001 to $15,000||20%||26%|
|More than $15,000||30%||31%|
You will receive a T4 RRSP receipt for any funds withdrawn during the year showing the amount to be included in your taxable income and the credit for the withholding tax.
During separation or divorce, either you or your spouse can transfer existing RRSPs to the other, without being subject to tax, provided that:
In the event of death, the proceeds of your RRSP are distributed to whoever was named as your beneficiary or to your estate, if no beneficiary has been designated. This designation can be specified in either your RRSP or in your will. Quebec residents must make the designation by will or marriage contract for most plans. The proceeds of the RRSP will remain tax-sheltered if one of these situations applies:
In all other situations, the balance of the RRSP at the date of death is included as income on the plan holder's final tax return.
Please contact the RRSP specialists at Macnaughton & Ward Financial Services for further information and for assistance regarding your savings and registered investment account(s).