Registered Retirement Savings Plan (RRSP)

Growing old is inevitable, but being smart about it is a personal choice. It is always better to plan your way into retirement, and that is why the Government of Canada introduced the Registered Retirement Savings Plan (RRSP). An RRSP is a retirement savings tool that allows you and your spouse to make contributions and withdraw them as and when required.

In this blog, we will dive into the RRSP and comprehend its meaning, process, eligibility criteria, tax implications, and contribution limit.

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What is a Registered Retirement Savings Plan (RRSP)?

The Registered Retirement Savings Plan (RRSP) is a savings tool for Canadians that allows them to invest in and expand their savings tax-free. The only time tax will be charged will be when a withdrawal is made, and even then the tax rate will be low. An RRSP allows withdrawals to be made at any time and matures on December 31 of the year the contributor turns 71. A transfer can be made directly through your savings account. The RRSP is a part of the Canadian Income Tax created in 1957 and is managed by the Canadian Revenue Agency (CRA). It can be broken down into four types. They are:

• Individual RRSP has a single person as the contributor.
• Spousal RRSP allows the high earner to contribute more in the spouse’s name. The tax benefits are enjoyed by both spouses.
• Group RRSP is setup by employers for their employees and the contribution is cut from their pay.
• Pooled RRSP is an RRSP for self-employed Canadian employees and employers.

How Do RRSPs Work?

An RRSP is a savings plan that helps a person save for a comfortable retirement. The investments are tax-deferred until a withdrawal is made. RRSP provides:

• Tax-deferral
• Tax-sheltered earnings
• A tax-deductible contribution

One can open their RRSP with the following financial institutions:

• Banks
• Credit Unions
• Mutual Fund companies
• Investment Funds
• Life Insurance Companies

Why Invest Your Money with RRSP?

The retirement plan is the perfect way to live out your old days. RRSP is warmth in a shivering cold. One should invest their money in an RRSP for the following reasons:

• It reduces a person’s tax bill as the contributed amount is tax-deductible.
• Enjoy watching your savings grow while indulging in popcorn.
• Achieve goals with the LLP and HBP programmes by funding them through the RRSP.

What is Your RRSP Contribution Limit?

There isn’t a formula to calculate your RRSP contribution limit. The Canada Revenue Agency (CRA) regulates the functioning of RRSPs. Therefore, it is the body that provides you with information on your contribution limit. You can find your RRSP contribution limit in the following ways:

• The CRA will mention your limit in the latest Notice of Assessment. If there are any changes made post-previous assessment, a form T1028 will be sent with an updated RRSP limit.
• You can log on to the CRA’s ‘My Account’ service online or through the app to find out if you have any unused contribution room.

The CRA calculates your deduction limit as follows:

• 18% of the income reported by you on the tax return of the previous year.
• The annual RRSP limit is calculated as listed on the previous year’s tax return, up to a maximum of $27,830, plus any contribution room carried forward from previous years, less any pension adjustments.

CRA will use the method that will result in the least amount. The RRSP contribution limit for the year 2021 was CAD 27,830. 

A person is allowed a maximum overcontribution of CAD 2,000. This is known as the buffer amount. If a person exceeds this amount by including the real limit, a penalty of 1% is charged each month on the amount exceeded.

RRSP Investment Option

In an RRSP, a person gets diversified options to move their money into. The investment options are:

• Cash
• Savings account
• Guaranteed Investment Certificates (GICs)
• Mutual Funds
• Government and Corporate Savings Bonds
• Securities that are listed on a designated stock exchange
• ETFs

There are a few assets that cannot be held as an investment option. They are:

• Personal property like art, antiques, etc.
• Commodity future contracts
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• Precious metals
• Shares in private companies
• Real estate

RRSP Eligibility

As long as a Canadian resident generates income through employment and files tax returns, they can contribute to an RRSP. Unlike the TFSA, which requires the account holder to be 18 years or older, there is no minimum age requirement for RRSP eligibility. Every RRSP has an expiry date. When a Canadian turns 71, their RRSPs must be closed on December 31 of that year. Upon expiration, the people have three options:

• Withdraw all the money.
• Convert RRSP into RRIF.
• Purchase an annuity using the RRSP money.

Benefits of RRSP

An RRSP is more than just a tax break. The benefits of an RRSP are the following:

• Contribution to RRSP means less net taxable income. The amount you invest and the amount you gain are protected by the RRSP from tax. However, when you make a withdrawal, you will have to pay tax on the amount withdrawn, and most likely, you will fall under a low tax bracket.
• If you were not able to maximise your contribution year in the previous calendar year, you can make a larger contribution in the current year and maximise your contribution room. This will drastically reduce your net taxable income. The last year’s tax return’s Notice of Assessment informs you if you have unused contribution room.
• The Federal Government of Canada protects the money in your RRSP in case you go bankrupt. Any contribution made within the year of bankruptcy does not get protection from the creditors.
• The Federal Government allows a Canadian to withdraw an amount from the RRSP to either make a down payment on their house or perhaps to go to school. The Home Buyers’ Plan allows a withdrawal of CAD 35,000 and the Lifelong Learning Plan allows a withdrawal of CAD 10,000 each year from the plan.
• An RRSP allows a person to share their income with their spouse. Their contribution is also shared by the spouse who earns more. The contributing partner receives a tax deduction on the contributed amount.

RRSP Contribution Rules

There are certain rules that a person has to follow when it comes to their contribution towards an RRSP. The following rules are to be followed:

When Maturity Strikes

• Once a person hits the age of 71, they must close their RRSP at the end of the calendar year.
• A person can either withdraw the full amount or convert the RRSP to a Registered Retirement Income Fund (RRIF) or purchase an annuity.

Withdrawal Before Maturity

• One can withdraw an amount from their RRSP before maturity but will be liable to face the tax implications.
• A person will have to pay a withholding tax and income tax, and you will lose your contribution room.
• The person will have to wait for the next tax year to make contributions.

When Do You Pay Taxes on RRSP?

A person has to pay tax on an RRSP at the time of the withdrawal of funds. The amount of money contributed and the amount gained are not taxable. The tax rate on withdrawal is as follows:

Quebec province withholds the provincial tax. Therefore, the tax rate differs.

Go big or go home. Now that you are aware of what the RRSP offers you, visit the nearest financial institution and fill out your RRSP application! You ain’t getting any younger.

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