RRSP – Registered Retirement Savings Plan
If you need to open a new RRSP or consult an expert regarding the most efficient way of growing your money for retirement, sign up for an appointment with one of our Financial Services Officers!
What is an RRSP
RRSP (Registered Retirement Savings Plan) is a government-approved way to help save money for your retirement by holding qualified investments such as term deposits, guaranteed investment certificates, mutual funds, bonds, and other eligible securities. You can have several plans.
RRSP is a separate account where you can contribute money regularly, up to certain limits, and these funds are tax deductible, therefore, they reduce the amount of income tax payable in a year. This allows your savings to grow tax-sheltered more quickly. An RRSP account allows you to save and invest during your peak earning years so that you have a carefree retirement later.
How it works
Anyone with earned income subject to Canadian taxes may contribute to an RRSP until the age of 71. Even if you have income below the taxable threshold, you should file a tax return form to report your earned income and create an RRSP contribution room.
Your contribution limit is the total of this year’s deduction limit and any unused contribution room you have. Every year, you build a contribution room equal to the lesser of 18% of your income or the yearly maximum announced by the government. Check your Notice of Assessment for your total contribution room.
Contributions can be made at any time during the year. Contributions made in the first 60 days of any year may be deducted from the income of the prior tax year, current year, or future year.
You may want to set up a spousal or common-law partner RRSP as well. This can help ensure that retirement income is more evenly split between both of you. The benefit is greatest if a higher-income spouse/partner contributes to an RRSP for a lower-income spouse/partner. The contributor then receives the short-term benefit of the tax deduction for the contributions, while the beneficiary, who is likely to be in a lower tax bracket during retirement, receives the income and reports it on their income tax return filing.
How to set up
You set up a registered retirement savings plan (RRSP) through a financial institution such as a bank, credit union, trust, or insurance company. Your financial institution will advise you on the types of RRSPs available and the investments they can hold, as well as help you choose the right plan for your needs.
When deciding which RRSP is best for you, always ask about fees and transaction charges, especially for mutual funds which can have management expenses, front-end commissions or deferred sales fees.
Remember that any capital gains or dividends earned in an RRSP will eventually be taxed as income. On investments held outside an RRSP only half of the income would be taxed, and taxes on dividend payments would be reduced by the dividend tax credit. Your financial advisor can help you minimize your tax exposure.
Here’s an example of an RRSP contribution calculation for 2022. Andrew is employed full-time. In 2022, he made $50,000 pre-tax. His employer does not provide any pension plan. Here’s what his calculation would look like: 18% of $50,000 or $30,780, whichever is less. Let’s do the math: $50,000 x 18% = $9,000. That is less than the maximum limit of $30,780 so his RRSP deduction limit is $9,000. Andrew doesn’t have any pension adjustments, so his total deduction limit is $9,000. If Andrew makes a $5,000 contribution to his RRSP, he’ll have $4,000 unused eligible contribution room. In 2023, he’ll be able to carry forward that $4,000 and add it to his deduction room. If his deduction room remains $9,000, he will be able to contribute a total of $13,000 to his RRSP ($9,000 + $4,000 carry forward=$13,000)
What types of RRSPs exist?
There are four basic types of RRSPs.
- Deposit-type RRSPs – with the money invested in savings accounts, term deposits, or guaranteed investment certificates. The rates paid will vary. These deposits are usually protected by deposit insurance.
- Group RRSPs: many employers now make group RRSPs available to their employees, instead of defined benefit pension plans. An individual account is maintained for each employee within the group RRSP. If you leave the employer, you can transfer the money to another RRSP without paying tax. Consult a financial advisor at your local credit union before any such move.
- Spousal RSP allows you to register a retirement account in your spouse’s name and make contributions there. Your contributions would be tax-deductible, but the actual investments will remain in the spouse’s name.
- Self-directed plans – these allow you to hold a wider range of investments, however, such plans are suitable for people with investment experience and a larger amount invested, otherwise, the administrative and transaction fees, as well as risks, may be too high.
Can I withdraw the funds from my RRSP account?
You can withdraw your funds at any time, but any withdrawal is added to your taxable income in the year it is taken out. Also, withdrawals from RRSPs are subject to the following withholding taxes at source:
10% – An amount up to $5,000.00
20% – $5,001 – %15,000.00
30% – $15,001.00+
There are special rules for withdrawals from spousal plans.
Can I transfer my RRSP investment to another financial institution?
You can transfer your RRSP to another issuer at any time, unless the investments are non-redeemable, which means you may not be able to make a transfer until the term of the investment expires. The transfer must be made directly from one issuer to another.
What happens if I over-contribute to RRSP?
An over-contribution of up to $2.000 is allowed and can be carried forward indefinitely. But if you go over $2,000, you will pay a penalty of 1% in tax per month on the excess in your account.
Can I borrow money to contribute to my RRSP?
You can borrow to make an RRSP contribution, but you cannot deduct the interest on the loan.
Can I use my RRSP investment before retirement?
You can borrow from your RRSP for some major life events such as buying your first home through the Home Buyers Plan or pursuing an education using the Lifelong Learning Plan.
What are the Restricted RRSPs?
Locked-in RRSPs, locked-in retirement accounts, and restricted locked-in savings plans are special plans that hold funds transferred from registered pension plans. Withdrawals from such plans are not normally allowed.
Is there anything extra that can be added to RRSP?
In addition to your RRSP deduction limit, there are times other deposits are allowed. Lump sum transfers can be made directly from a registered pension plan, a deferred profit-sharing plan, another RRSP, or a registered retirement income fund (RRIF).
If you are laid off from your job, eligible parts of your retirement allowance can be transferred directly to an RRSP by your employer or can be paid to you and you can set up an RSP, with no tax deducted.
There is much more information available about RRSPs and best practices, and of course, there is no universal solution that would suit everyone. To know more and make the right choice that would suit specifically your situation, make sure to always consult your Financial Services Officer.
We at BCU Financial would be happy to serve you with all your savings needs, be it consultancy or opening and handling your account. You can reach us by phone or visit your nearest BCU Financial Branch, and our financial advisors will be at your service.