A Registered Retirement Savings Plan or RRSP is an account that provides tax benefits for saving for retirement in Canada. RRSP refers to a provision in the Income Tax Act that allows a person to shelter financial property from income taxes.
Examples of financial property that can be held in an RRSP are: savings accounts, guaranteed investment certificates (GICs), bonds, mortgage loans, mutual funds, income trusts, corporate shares (stocks), and labor-sponsored funds.
If you scroll down, you will find the answers to many questions you may have on the features and benefits of RRSPs. Should you have further questions, please speak to your Rothenberg financial advisor.
RRSP Contribution Limits
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 generally calculated as 18% of a person’s earned income from the previous tax year, minus any “pension adjustment”, up to a specified maximum. For 2016 the maximum contribution is $25,370 and for 2015 it was $24,930. Since 2014 the RRSP contribution limit will be indexed to the annual increase in the average wage. Any RRSP deductions not taken in a tax year are carried forward indefinitely to future tax years. So, for example, if a person’s RRSP deduction limit is $8,000 and he deducts only $3,000, the unused $5,000 deduction is carried forward.
After filing a tax return (or any adjustments to the tax return), each tax payer receives a Notice of Assessment from the Canada Revenue Agency, indicating their new RRSP deduction limit.
RRSPs may reduce taxes in up to 3 ways:
- Contributions to RRSPs, up to permitted limits described above, may be deducted from one’s income before calculating income tax due.
- Income earned within the account (interest, corporate dividends, trust distributions, capital gains) is not taxed until money is withdrawn from the plan, allowing the plan to grow faster than the same investments would grow if they were held outside the plan and thus subject to tax.
- Money may be withdrawn from an RRSP in tax years when one is in a lower income-tax bracket because of lower income (due to retirement, unemployment, etc.) than tax years when one makes contributions.
RRSP withdrawals are taxed at your marginal tax rate. However, the financial institution will be obligated to withhold a certain percentage at source which is shown below. For residents of Canada, the rates are:
- 10% (21% in Quebec) on amounts up to $5,000;
- 20% (26% in Quebec) on amounts from $5,000 to $15,000; and
- 30% (31% in Quebec) on amounts over $15,000.
Withdrawal of RRSPs
An account holder is able to cash out an amount from an RRSP at any age. However, any amount withdrawn qualifies as taxable income and is therefore subject to withholding tax. Before the end of the year the account holder turns 71, the RRSP must either be cashed out or transferred to a Registered Retirement Income Fund (RRIF) or an annuity.
Home Buyer’s Plan (HBP)
While the original purpose of RRSPs was to help Canadians save for retirement, it is possible to use RRSP funds to help purchase one’s first home under what is known as the Home Buyer’s Plan. Canadians can borrow, tax-free, up to $25,000 from their RRSP (and another $20,000 from a spousal RRSP) towards buying their residence. This loan has to be repaid within 15 years after two years of grace. Contrary to popular belief, this plan can be used more than once per lifetime, as long as the borrower did not own a residence in the previous five years, and has fully repaid any previous loans under this plan. Click here for the HBP Guide.
The Lifelong Learning Plan (LLP)
allows Canadians to pull up to $20,000 from their RRSPs to head back to school. The withdrawals can be a maximum of $10,000 in any one year and can be spread over four years. Repayment is on a 10-year schedule. About 49,000 people have withdrawn $363 million since the LLP began in 1999.
Click on the link below to view the complete guide relating to this program:
Lifelong Learning Plan Guide