Blog, Financial Planning and Tax Considerations

What Is a Registered Retirement Savings Plan (RRSP)?

Registered Retirement Savings Plan - RRSP

What Is RRSP?

A registered investment and retirement savings account with the Canada Revenue Agency (CRA), offers Canadians the opportunity to invest their money and save for retirement while receiving tax benefits. Because contributions you make to an RRSP are not considered taxable as part of your income, the amount of tax you owe can be reduced.

It is not like a regular savings account since it is a location where you can store your investments and the development of those investments is not subject to taxation until you take the money out of the account.

Because you will most likely be retired when you take your money, you will typically be subject to a lower tax rate than you were during your highest earnings. As a result, you will be able to preserve more of your money for retirement.

How does it work?

  • Have a conversation with a financial professional about opening an RRSP with the appropriate investments for your retirement goals and your level of comfort with risk.
  • Determine the contributions that are appropriate for your circumstances while ensuring that you do not go over your contribution limit.
  • Your annual contributions can be deducted from your taxable income, resulting in a lower total tax liability.
  • The growth of any investment is not subject to taxation.
  • You can access the funds anytime, but any money you take out is subject to taxation.
  • You also can make tax-free withdrawals to pay for the purchase of your first house or the schooling of either you or your spouse, provided that you meet the requirements.
  • Your RRSP will change to an RRIF at the age of 71 or when you are ready to retire, at which point you will be required to begin taking withdrawals of the required minimum yearly amount.
  • You also have the option of purchasing an income annuity for yourself.

What is your RRSP contribution limit?

The Canada Revenue Agency will, in most cases, determine your maximum allowable contribution based on the following three considerations:
Sum of the portion of your allotted deduction space in the prior year that was not utilized.
Now incorporate the lesser quantity of:
– $27,830, which is 18% of the earned income you declared on your tax return for the previous year (the annual limit for 2021)
After that, deduct from the prior year any pension adjustment that was made (if applicable)

What happens if you go over your RRSP limit?

You will be subject to an additional tax of 1% per month on any amount higher than the maximum allowable contribution of $2,000. You will be subject to late-filing penalties and interest charges if you do not pay the excess tax within the first ninety days following the end of the calendar year.

What are the tax advantages?

An RRSP gives immediate and future tax advantages.
Initial advantages:
It’s almost like giving money to yourself twice: simultaneously, you’re putting money away, and you’ll also lower the income subject to taxation. Let’s say you have an annual salary of $80,000, and you decide to contribute the maximum amount you are permitted to into your RRSP, which is $14,400. The Canada Revenue Agency will only subject you to taxation on the income of $65,600 when it comes time for you to pay your taxes.

Registered Retirement Savings Plan

Registered Retirement Savings Plan

Future advantages

When you withdraw from your RRSP, typically when the account holder is in a lower tax bracket due to retirement, any growth that occurred on the investments held within the account is exempt from taxation.

  • Tax-Deferred Savings: Any investment income generated by investments held within the plan is tax-deferred for as long as it is held in your RRSP. This applies to any and all investment income generated by investments held within the plan. This includes any revenue produced from investments made on assets that are held by the program itself.
    Contributions you make to an RRSP are eligible for a tax deduction, which might lower the total income tax you owe over the course of your lifetime.
  • Increasing Your Deductions: If you have unused RRSP contribution room from years in which your income was lower, you can carry that room forward and use it in years when your payment is expected to be greater. If you do this, you may be able to reduce the amount of money you owe in taxes, even if you are at a higher tax rate.
  • Income Splitting: If you contribute to a spousal RRSP and have a higher combined income than your husband or common-law partner, you may be able to lower the total amount of tax you owe.
  • Financing the Purchase of Your First Home or Education: If you are eligible for the Home Buyers Plan or the Lifelong Learning Plan, you can withdraw money from your RRSP without having to pay taxes on it right away in order to finance the purchase of your first home or education. If you are not eligible for either of these plans, you cannot withdraw money from your RRSP.

When can I withdraw my money?

You are permitted to withdraw from your RRSP at any time3, provided that your funds are not part of a locked-in plan; however, withdrawals are generally counted as part of your income and are subject to taxation in the year that they are made.

The majority of the time, a portion of the money that you withdraw will have some of that amount deducted and sent to the government as a down payment on the income tax that you are going to owe for the following year.

It may be to your financial advantage to delay withdrawals until a year in which your taxable income would be lower. This advice is dependent on how much of your taxable income you choose to withdraw from your account.

In addition, RRSP withdrawals are not added back to your contribution room in the year following the withdrawal, whereas TFSA withdrawals are.

How long can my RRSP stay open?

After the 31st of December in the calendar year, you turn 71, you are no longer eligible to own an RRSP.

At that point, you will be required to take funds out of the RRSP as a lump sum withdrawal, transfer the contents of the RRSP to a Registered Retirement Income Fund, or purchase an annuity.

You can see more details about RRSP here.

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