Registered Retirement Savings Plans (RRSP)
A Registered Retirement Savings Plan (RRSP) is a personal savings account that has special tax advantages and is specifically designed to help Canadians invest for retirement. It is a savings and investing vehicle for employees and the self-employed in Canada that can hold a variety of investments like mutual funds, segregated funds, bonds and equities, etc. Your contributions are tax deductible which means that your pre-tax money is placed into an RRSP and grows tax-free until withdrawn. There is no tax on the income earned while the funds are in the plan. RRSPs are an amazing tool to cut down your current-year tax bill while letting you keep more money for your current needs and helping you save for retirement. Upon retirement, when you start to withdraw money, it will be taxed at a marginal rate, as tax rates usually are lowered when you are retired than when you were employed. It is a government approved plan registered with the Canadian government and overseen by the Canada Revenue Agency (CRA).
Types of RRSPs
- 1. Individual RRSPs: It’s an RRSP registered in your own name and one to which only you can contribute and the tax benefit belongs to you.
- 2. Group RRSPs: This is an RRSP set up in the name of a group and usually offered by employers to their employees to help them save for retirement.
- 3. Spousal RRSPs: An RRSP registered in the name of your spouse or common-law partner to which you can contribute and claim the tax deduction.
How Does an RRSP Work?
- 1. Anyone who is a Canadian resident, under the age of 71, with a valid Social Insurance Number who has earned an income and filed income taxes for the previous year, is eligible to open an RRSP.
- 2. An RRSP account can hold a variety of investments like stocks, bonds, mutual funds, GIC’s and segregated funds, etc.
- 3. The RRSP Contribution limit for 2022 is 18% of earned income to a maximum of $29,210, plus unused RRSP deduction room, less any pension adjustments.
- 4. Contributions are made with pre-tax dollars.
- 5. Contribution room is based on your income, in your lower-income-earning years you will accumulate less contribution room.
- 6. Your contributions are tax-deductible and reduce your current tax bill.
- 7. Any unused contribution room can be carried forward indefinitely to use in future years.
- 8. Taxes on your investment income are deferred until it’s withdrawn.
- 9. You can access money whenever you need it but withdrawals will be taxed as income in the year withdrawn.
- 10. You can withdraw tax-free to buy your first home or for you or your spouse’s education, if you qualify.
- 11. If you make withdrawals, you permanently lose your contribution room for the amount you take out.
- 12. An RRSP account is protected from creditors and can’t be seized to cover personal liabilities.
- 13. An RRSP matures at age 71 and you must convert it into a Registered Retirement Income Fund (RRIF) or Annuity or lump sum payout.
- 14. You are required to withdraw at least the prescribed minimum each year after the RRIF is established.
- 15. RRIF withdrawals are taxable and affect income-tested government benefits and credits.
Benefits of RRSP
- 1. Tax-Free Investment Earnings: Your capital gains, interest and dividend income from qualified investments are tax-free.
- 2. Contributions are Tax-Deductible: RRSP contributions are considered a tax deduction and will lower your net income. This can increase your income tested government benefits on top of your income tax rebate.
- 3. Various Investment Options: There are many flexible investment options available .An RRSP account can hold stocks, bonds, mutual funds, GICs, and segregated funds, etc.
- 4. Withdrawals at Any Age: You can withdraw from an RRSP at any age. Withdrawals are allowed even before retirement and this is an amazing option for early retirees.
- 5. Tax-free Compounding: Any investment made inside an RRSP will grow tax free. This lets you take the advantage of the power of compounding and your investment compounds much faster because taxes don’t eat up the interest you earn. This results in faster growth of your hard earned money.
- 6. Unused Contribution Room Never Expires: Unused RRSP contribution room can be carried forward indefinitely to future years which provides you with more room to invest in your future.
- 7. Regular Contributions Helps Faster Growth: Instead of contributing a lump-sum amount at the end of the year you can contribute regularly throughout the year .This will result in faster growth as contributions will have a longer time to increase in value.
- 8. Home Buyer Plan (HBP) for First Time Home Buyers: You can withdraw $35,000 tax-free under the HBP plan for first time home buyers. It allows people to make an RRSP contribution, get a tax refund, and then withdraw that money using the HBP without paying tax.
- 9. Life-Long Learning (LLP) Plan: You can use an RRSP to fund your or your spouse’s education under the Lifelong Learning Plan (LLP) and can withdraw $10,000 tax-free in a calendar year for the purpose of training or education.
- 10. Creditor Protection: RRSPs are protected from creditors and can’t be seized to cover personal liabilities.
- 11. Lower Life-Time Tax Rates: As contributions are made during high tax years and withdrawals will be made in low tax years, it can help you enjoy a lower average lifetime tax rate.
- 12. Contributions and Earnings Taxable at Withdrawal Only: Your contributions and earnings are taxable only when withdrawn. Usually earnings are lower in retirement than when the money is contributed. This results in contributions and earnings to be taxed at a lower rate in retirement.
Choosing Between an RRSP and a TFSA
If you are looking to save in a tax-efficient manner then a TFSA and RRSP both are great tax-sheltered investments vehicles and can help you save money for the future. It’s important to note that they are not the same kind of investment as they both vary greatly in features. However, both can help you achieve your goals, depending on your circumstances. Each plan has its own distinctive features and you can compare the pros and cons to make an informed decision.
| Registered Retirment Savings Plan (RRSP) | Tax Free Savings Account (TFSA) | |
|---|---|---|
| Requirements | You need an earned income and should have filed your previous year’s income taxes. | You should be 18 years or older, a Canadian resident, with a valid Social Insurance Number. |
| Primary Purpose | The main purpose of RRSPs is for retirement savings. | You can do both short-term as well as long-term retirement savings. |
| Contribution Room | The RRSP Contribution limit for 2022 is 18% of earned income to a maximum of $29,210, plus unused RRSP deduction room, less any pension adjustments. | The contribution limit for 2022 is $6,000 regardless of income plus the available TFSA contribution room carried forward from the previous years. |
| Contributions Length | You can contribute until Dec. 31 of the year you turn 71. | You can contribute for your whole life. |
| Contributions are made with pre-tax dollars. | Contributions are made with after tax dollars. | |
| Contributions for Tax Purposes | Contributions are tax-deductible. | Contributions are not tax-deductible. |
| Contribution Deadline | March 1 or March 2 of a year is usually the deadline to claim the previous year’s deduction. | Deadlines are not applicable to TFSAs as contributions are not tax-deductible. |
| Withdrawal Rules | Withdrawals are allowed but will be taxed as income | You can make withdrawals at any time without any tax consequences. |
| Withdrawals will not increase contribution room. | Withdrawals will increase contribution room | |
| Withdrawals are included in taxable income and hence will affect your eligibility for government benefits. | Withdrawals are not included in taxable income and hence don’t affect any government benefits. | |
| Unused Contribution Room | Unused contribution room can be carried forward. | Unused contribution room can be carried forward. |
| Unused RRSP contribution room is permanently lost. | Unused TFSA contribution room never expires. | |
| Up-front Tax Advantage | It lowers your taxable income for the current year. | There is no up-front tax advantage in a TFSA. |
| Future Tax Advantages | Any income earned in your RRSP is tax-free as long as it stays in the plan. | You will not pay tax on any income earned or the money you withdraw. |
| Spousal Plan | You can contribute directly to a spousal RRSP. | There are no spousal TFSAs. |
| Creditors Protection | Protected from Creditors and can’t be seized to cover personal liabilities. | Not protected from Creditors and can be seized to cover personal liabilities. |
| Age Limit for Plan Maturity | An RRSP matures at the end of the calendar year in which you turn 71. | There is no age limit for a TFSA. |
When it comes to smart investing, RRSP is a great tax-sheltered investment vehicle. It’s a type of investment account that allows you to reduce your taxable income each year, while building up savings for future retirement income. We at Family Care Insurance know that saving for a retirement is crucial element of financial planning and doesn’t have to be challenging. We can show you how an RRSP can fit into your financial plan and can help you choose the right investments to make the most of the benefits offered by this powerful saving vehicle. We will review your current financial situation to make an informed decision in order to build a plan that will meet your needs and goals and can help you maximize your savings. Make well informed decisions with helpful and honest advice. Talk to us about how an RRSP can help grow your money for a worry-free retirement.